A company that presents negative results is in a delicate situation. However, what many entrepreneurs don’t know is that a positive balance can, at some point, mask a problem. To avoid this mistake, entrepreneurs can use 2 simple tools: the cash flow and the Income Statement (I/S).

These days, keeping a close watch on the financial processes of a business is an easy task, as there are technological solutions developed specifically for this type of business issue.

But despite this easiness, many companies have difficulty in analyzing their numbers, and don’t understand the reason for their losses. Therefore, this article aims to help you understand how cash flow and I/S can reveal the situation of your company. Enjoy your reading!

Cash Flow and I/S: understanding the company’s numbers

Cash flow is a simple accounting tool that is used even for family budgets. It is a constant subtraction of expenses on the earned amounts in order to verify a company’s ability to honor its commitments and generate revenue.

With cash flow, an entrepreneur can improve expense planning, as he is able to map out the expected costs for the business and comprehend which assets the company will receive (for example, receiving sales paid in installments).

In addition, by having a detailed cash flow, the business gains financial security, as the expenses are identified, thus, allowing potential losses to be found.

Another important point is confidence in decision making; after all, leaders can rely on the cash flow to know the risks involved in new investments, such as buying equipment.

However, there is a more detailed accounting study that uses the cash flow information as a basis: the Income Statement (I/S).

I/S: a tool to improve company results

Let’s use an example to understand how to calculate the I/S. Suppose that company X presented the amount of R$ 100,000 (in Brazilian Real) as revenue.

The first step is to subtract from this amount all taxes related to the company that need to be paid. In this example, the amount is R$ 5,000. Company X has, then, R$ 95,000 of gross profit.

The next step is to discount the amount of variable expenses from the gross profit. Variable expenses are those that change according to the business’s results. For example, expenses on suppliers.

In the case of company X, this burden was R$ 40,000. That is, this company has R$ 55,000 of operating profit. If this result is negative, it means the company is literally paying to work.

The time has come to discount the amount of fixed expenses, which are those that do not depend on the company’s performance – such as rent, internet provider, electricity, etc.

In this case, the amount is R$ 20,000. We reached the amount of R$ 35,000.

Now it is the time to discount personnel expenses, including the remuneration of partners. The end result is the Net Income of the Fiscal Year.

Cash Flow and I/S: revealing the business liquidity

Liquidity is the ability to turn assets into capital. The easier this task is, the more liquid is the asset. For example, selling the company’s headquarters is a task with low liquidity because it can take months.

When an entrepreneur uses cash flow and I/S to know the financial situation of the company, he discovers the business’s ability to pay its bills – something that is directly linked to investment ability and can define the growth of the enterprise.

Therefore, make sure you prepare a good cash flow and I/S. Note that many software programs do this job safely and automatically.

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