Your business statement of cash flows is the key most crucial, the least-used, and the poorest understood of the primary financial statements (P&L and balance sheet being the other two). Because many entrepreneurs use QuickBooks, we think its important to understand what must happen to get the most accuracy from this key report.
By setting up your QuickBooks properly and by utilizing it properly you get cash flow reporting that will help you maximize your company’s cash flow.
Ken Kaufman, a partner at CFOwise says: “If I could only receive one of the three financial statements, I would always pick the cash flow statement. It is the best indicator I have in my role of part-time CFO and business finance consultant for any business, especially start-up and emerging businesses.”
Guess what – It is very probable that your our QuickBooks-created cash-flow report is wrong for these 3 reasons:
Source: Ken Kaufman’s CFOwise Blog –
1. CLASSIFICATION OF ACCOUNTS
Each time a QuickBooks user creates a new account the system looks at the type of account and, if that account type is on the balance sheet, it is classified into one of the three sections of the cash flow – cash from operations, investing, or financing. QuickBooks is often right in its inclusion of accounts on the statement but it can be very wrong on the section of the statement in which the account should be included.
For example, a working capital line of credit is often coded as a current liability. QuickBooks assumes this account should be in the operating section of the cash flow, but that is not always the case. A line of credit is usually reported in the investing section of the statement.
The classification of all accounts can be manually changed in QuickBooks by going to Edit, Preferences, Reports and Graphs (Company Preferences), and then click on the Classify Cash button in the Statement of Cash Flows section. An account is placed on the report when a checkmark is next to the account in one of the three fields, which represent each section of the report.
The whole purpose of the statement of cash flow is to adjust the net income reported on the profit and loss to the cash position of the company. Depreciation is a non-cash expense, and, therefore, is added back to net income as a first order of business on the statement of cash flow. Since depreciation is not a balance sheet item, QuickBooks, by default, does not even include it on the statement of cash flows. QuickBooks does, however, include accumulated depreciation on the report, but it is reported in the investing section (depreciation is technically part of the operating section).
To correct this situation, two things must be done. First, follow the instructions above and remove the accumulated depreciation account from the report. Second, add the depreciation account to the operating section.
3. CHANGES TO PRIOR PERIODS
This issue often causes difficulties with all of the financial statements. Once a period is complete, all of the accounts are reconciled, and financials have been issued, there should be no more changes to that period or earlier.
This is done by going to Edit, Preferences, Accounting (Company Preferences), and then clicking on the “Set Date/Password” button in the Closing Date section. This will allow you to set the date of the close as well as only allow people to make changes prior to that date if they know the closing date password.