What is a Budgeted Cash Flow Statement? And How to Prepare It

Companies use financial statements to present their activities and finances to their stakeholders. Usually, these include four reports that are crucial in reporting different areas. They consist of the balance sheet, income statements, cash flow statements, and statement of changes in equity. Companies prepare these statements for a specific period. With these statements, stakeholders can understand how the company operated in that timeframe.

Each financial statement has its use and purpose. Usually, most stakeholders prefer the balance sheet and income statement. These show a company’s financial position and performance, respectively. For most stakeholders, these statements present a picture of operations during a period. However, they follow the accruals principle in accounting. They do not relate the cash transactions during the timeframe.

The accruals principle is crucial in presenting an accurate picture of a company’s transaction. However, it neglects a vital aspect of business and operations, cash. Cash transactions occur regularly for most companies. However, the balance sheet and income statement do not reflect those. Therefore, investors also consider the cash flow statement. This statement uses a cash flow basis instead of the accruals principle.

What is the Cash Flow Statement?

A cash flow statement is a financial statement used by companies to present their cash performance. It is similar to the income statement. However, it does not report revenues, expenses, or profits. Instead, it focuses on the cash aspects of the business. In the end, it presents whether a company has had net cash inflows or outflows. This presentation comes in three sections, which represent different areas of operations.

The cash flow statement includes three categories, namely operating, investing, and financing activities. The first, operating activities, represents cash flows from operations. Usually, these include cash transactions from sales, purchases and other daily activities. This category is crucial for investors to understand how companies generated or spent cash on operations.

The investing activities category in the cash flow statement includes a company’s investments. It considers the cash flows generated and spent on those investments. Usually, these include money put into and out of securities and assets. For example, investing activities may involve acquiring fixed assets or selling them. Similarly, investments in subsidiaries, bonds, or other instruments also fall under these activities.

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Lastly, the financing activities in the cash flow statement include cash generated from investors. These investors may consist of both shareholders and creditors. However, the latter involves lenders that provide funds like financial institutions. Similarly, financing activities include any cash outflows to compensate those financers. In most cases, it consists of dividends and interest payments.

Overall, the cash flow statement is a crucial financial statement. It includes a calculation of a company’s net cash inflows or outflows for a specific period. This statement also reconciles the opening cash and cash equivalent to the closing amount. This way, investors can understand the transactions that contributed to the movements in those balances. It does not consider any transactions based on the accruals principle.

What is the Budgeted Cash Flow Statement?

The budgeted cash flow statement is similar to a typical cash flow statement. However, it does not reflect a company’s cash performance in the past. Instead, it estimates those cash flows for the future. In other words, it applies budgeting principles to the preparation of the cash flow statement. With the budgeted cash flow statement, companies can predict their future cash flows in various areas.

The budgeted cash flow statement falls under a cash budget that companies prepare. This budget involves estimating all cash inflows and outflows for a company. On top of that, the cash budget allows companies to forecast their revenues and expenses for a period. With this budget, companies can predict future cash surplus and deficit positions. By doing so, they can take the necessary actions in each situation.

The budgeted cash flow statement also involves the same sections as the traditional version. Companies estimate their cash flows from various areas, including operations, investments and finances. Of these sections, the first comes from the operating budgets. On top of that, the budgeted income statement can also contribute to it. The other two may come from budgets or perceived future transactions.

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Essentially, a budgeted cash flow statement is the same as the cash budget. However, it uses the standard format for the cash flow statement. It arranges items from the cash budget into that format to make it presentable to stakeholders. In some cases, companies may also use the direct approach to the cash flow statement. For those companies, the cash budget may be the same as the budgeted cash flow statement.

Overall, the budgeted cash flow statement presents an estimate of future cash flows. It is similar to the cash budget but uses the standard format set by accounting standards. Some stakeholders like creditors or lenders may request companies to prepare this statement. Sometimes, however, companies may also need it for internal use. Either way, the budgeted cash flow statement is critical to budgeting.

How to prepare the Budgeted Cash Flow Statement?

The preparation of the budgeted cash flow statement differs from one company to another. Usually, it requires all cash inflows and outflows during a period. This process falls under the preparation of a cash budget. Therefore, the budgeted cash flow statement depends on that budget. On top of that, companies also some figures through the budgeted income statement.

Companies must go through several steps to prepare the budgeted cash flow statement. These steps are crucial in reporting figures in the budgeted statement accurately. Usually, it involves the following process.

Prepare the budgeted income statement

A typical cash flow statement starts from the net profits from the income statement. After that, it adjusts those profits for any non-cash items. Usually, those items include depreciation, amortization, interest and tax expenses. The budgeted cash flow statement may depend on the budgeted income statement for that reason. Companies do not prepare the budgeted income statement first for that reason only.

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The budgeted income statement estimates the future sales and expenses that companies might incur. It presents the picture based on the accruals concept. Nonetheless, companies can forecast the transactions on a cash basis within those items. Consequently, companies can prepare the cash budget and budgeted cash flow statement.

Prepare cash budget

The first and most crucial part of the process is preparing the cash budget. This budget includes two factors, namely incomes and expenses. However, it does not require actual figures or past data. Instead, the cash budget estimates those metrics for the future. This process is also similar to preparing the budgeted income statement.

The cash budget estimates future incomes and expenses. However, it does not consider those occurring on an accrual basis. Instead, it concerns the cash aspects of those items. Once companies prepare the cash budget, they can forecast future cash flows. These cash flows can then become a part of the budgeted cash flow statement.

Separate cash flows

The last step for preparing the budgeted cash flow statement is to separate the cash flows. As mentioned, this statement includes three sections, namely operating, investing, and financial activities. When companies prepare the cash budget, they do not segregate cash flows under those areas. However, the budgeted cash flow statement requires that separation.

Therefore, companies must transfer cash flows from the cash budget to the budgeted cash flow statement. Consequently, they must also segregate those cash flows under the different headings. Usually, any figures derived from the budgeted income statement will fall under the operating activities. Other cash flows can become a part of the investing and financing activities.

Conclusion

The budgeted cash flow statement is similar to a typical cash flow statement. However, it does not include actual or historical cash flows. Instead, it estimates those figures for the future based on a cash budget. Companies can prepare the cash flow statement by following several steps. These steps are available above.

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