G'day Justin Hogg from Right Source talking all things accounting and getting you
to an insight into how financial statements might work and a little bit
more knowledge you might use next time you talk to your accountant so we've
talked about previously what a cash flow statement is and we talked effectively
through what a direct cash flow statement was, what I wanted to show you
today was an indirect cash flow statement so it's the same gets you to
the same number in terms of talking you through what's changed in your bank
balance from one period to the next but instead of talking through three
categories like the direct cash flow does this one talks to you in terms of
well this is what you made in terms of a profit for the period and talks you
through to why that is different to the cash that has moved through your bank
account so it gives you an understanding of the effect of your profit has in
terms of your bank account balance so if we have a look at an indirect cash flow
statement it has a similar structure to the direct and that has operating
finance and investing categories so it's always good to have an understanding of
what a direct cash flow statement is talking about when you before you look
at it indirect but and there's definitely another video of mine if you
want to go check it out on YouTube or want a direct cash flow statement but
otherwise this indirect one it's really about it changes how the operating
activity section is broken up in that statement and as I said it takes you
through from that profit and loss through to your operating cash flow
effect on your business now stepping through this one it starts with
your net profit which is your ending balance on your or your ending figure on
your profit and loss statement and effectively adjust it for non-cash
transactions and movements in your balance sheet so let's just talk through
some of these items so from your net profit the the first aspect it goes
through is your non-cash items now generally speaking this is depreciation
because depreciation is effectively representing your profit and loss how much
your assets are devaluing as they're being used but it doesn't represent cash
so there's no cash cost to depreciation so you need to adjust for that
so let's you first step in your cash flow reconciling the net profit back
down the remaining parts of this operating cash flow section are
then adjusting for movements in your balance sheet that relate to cash so
when you look at your assets the first area that you'll have a cash impact on
is your accounts receivable or your debtors so when people have paid you now because
this is different timing to necessarily when the invoice is raised the movement
in your debtors can affect your operating cash flow because you might
get paid for something later like next period that you actually
earned in terms of revenue this period so that's a timing difference which it
helps represent similarly then the next below that is your changes in liability
so you might have expenses that you incur that you pay for later so this
again helps with the timing of when that cash is going out of your business
so when you take your non-cash items your movement and certain assets and
certain liabilities that then gets down to a net cash flow from operating
activities which should be exactly the same as the one that is represented in
your direct cash flow statement with those two figures being the same that
then allows you to understand by looking at these numbers how your net profit
relates to the operating cash flow and then how that operating cash flow relates to
the overall movement in your cash in your business and together this helps
give you a picture of your cash that's going your cash movements in your
business and what that means in terms of how you are operating your business so
that's it for indirect cash flow as I said earlier if you want to look at a
video that talks through how a direct cash flow works and what the meaning is
behind that there's a video I've done previously on that there's also other
videos on the YouTube channel you can check out whether it's helping your
budget or understanding accounting there's a fair few to pick from plus you
can get some templates down if you need them otherwise please subscribe because
that way you won't miss any more these videos it will help keep building that
accounting muscle and helping you run your business just a little bit better
and I look forward to talking to you next time it's Justin Hogg from Right Source