In the world what Importance and requirement of cash flow statement? Today, let’s dive into the topic Importance and requirement of cash flow statement? Hey everyone, I’m Todd, I think you’ll have a high level understanding of in the world Importance and requirement of cash flow statement? How maybe it’s different than a balance sheet? How it’s different than an income statement and why it’s kind of a good marker to show you the health and wellness of your company and of your investing strategy. So a lot of time,s when you are applying for a loan or you’re you know working with financial people, they’ll say okay we need your financials.
Importance and requirement of cash flow statement
What they usually mean by that not just your bank statements and your tax returns but they also may want a balance sheet. Which we’ve discuss about before an income statement and a cash flow statement. Now if you’re a public company these things are required. The SEC has made it clear that you need to have these things as you know reporting to your shareholders. The government now if you are just a real estate investor who has an LLC that owns one or two homes. You don’t have to have a cash flow statement. you have some yearly reporting’s. You have a tax in a tax return clearly right but the cash flow statement is for you to sort of gauge. The health of finance investment and see how does the money actually come in and come out. So who are we well, we are longtime real estate investors, we left our day job a number of years ago to focus on the passive income.
The cash flow from our investment properties are buy and hold rental properties that’s the vehicle that we use to build financial freedom. So for us we use a cash flow statement really at the end of the year to look at overall. It’s not something, we’re analyzing every day and it’s not something we’re analyzing every month but the end of the year, it really gives you a strong snapshot that oh wow. I spent a lot on cabinets this year. I spent a lot on these other debt items but was my cash coming in from our tenants was that sustainable did. We do well this year. I’m very comfortable tracking our wealth with balance sheets and income statements the cash flow statement is actually something, I asked or from my accountant. It’s not something that I do on my own although my father he says that he like lives and dies by his cash flow statement. It’s what keeps him up at night is, i just don’t work that way. I worry more about the balance sheets. So we don’t have a giveaway for you but there’s so many that you can get on the internet.
If you want but basically the cash flow statement is going to delineate the types of cash that you have coming in right. So let’s pretend that you own an apartment complex or a few rental real estate properties inside of one LLC. You’re thinking of making a cash flow statement for that LLC well then you’re gonna write down. How exactly does that LLC make money. So for the most part, it’s gonna be rental income, so it’s gonna be rental income. I don’t know any other way that that LLC was making money this year. Typically it’s gonna come from the rent from your tenants right. So you’re going to write down all of the cash that came in from those tenants for that year in that LLC, Now maybe you had five properties one of them was vacant for two months. The other ones were burning in churning, it’s the sum for that whole year. How much cash was coming in and then you’re gonna look at that compared to the amount of expenses that went out the window. So if you weren’t just a real estate investing company but instead maybe you were a baker right.
You’re going to look for cash from actual sales but maybe you had an affiliate sale with a coffee store down the street. So they paid you some money for referrals or you know there may be a lot of businesses have all kinds of ways that they make money. So that would be on the cash flow statement depreciation on your properties does not go on your cash flow statement. Al though even that is sort of a way, you’re making money because you’re paying less in taxes that’s not income. So we’re only discussing about actual income not credit for income or any thing. So cash flow statement shows really the health and wellness of your overall investing your company.
Things that would be on there or like your interest payments. This is cash going out right so what we just talked to you is cash going in right. Now another important part of the cash flow statement is cash going out. So then you’re going to write what well you’ve got taxes clearly? You’ve got insurance right maybe you have some debt service like the loan that you have on those properties. You are paying a property manager. I would hope maybe your lawyer team, your legal team. If you pay someone’s salary right like your property manager, maybe you pay on salary. I don’t know that’s possible, if there’s a handyman that lives in the building right to yourself a salary. So when you actually stack those two things up against each other how much cash is coming in.
What you’re using your cash for well that’s how you then judge the health of a company a lot of times you know if you flip on CNBC when one company is reporting annual earnings and you see everyone has an opinion about the cash flows here we go they only use spend this much on research and development like you know or Apple spends too much in research and development right this is where people can sort of judge what you’re doing with your money now that’s not the point of you as a small business owner having a cash flow statement. It is really for you to judge okay what expenses are acceptable and what here may be if not I really think at the end of the day a cash flow statement is really important because people can be allured almost like a vampire who putting you in a trance about your investments and you can think that Wow I’m doing great I’m getting all this money from my tenants. You’re really not paying attention to those expenses, that have been mounting or adding up. There are these expenses that you might not have thought about. They’re the thing these things that are adding up and then when you get to the end of the year. It’s wash all of the profit, you made completely went out the window in the roof repairs and the property management fees.
All of these other things that you didn’t account for, so a balance sheet is great. A balance sheet can show you that you own a $50,000 that versus the car that’s a liability but the cash flow statement can really show you wait a second. These 10 rental properties these are junk like maybe these are performing at the level. I thought they were and it can give you an opportunity to rethink your overall portfolio. Maybe sell off the dogs in your portfolio exactly. It’s just a great way to take a temperature of how well your business is doing? So that’s a cash flow statement at a 30,000 foot level we hope you found this useful.