Businesses use financial statements of all kinds to help them understand the cash flow process and financial health of their companies. However, one of the most influential reports is the consolidated cash flow statement. But what is it exactly?
In summary, a consolidated cash flow statement includes cash inflows and outflows as well as cash flow data for all businesses under the same company.
For example, if you have one main business and five subsidiaries, you will combine all of this data into a consolidated cash flow statement. Why? You’ll see the true financial health of the entire operation rather than each business individually.
Consolidated Cash Flow Benefits
If you’re unsure about consolidating your business’s cash flow, you should know the benefits of this process. Here are the most common benefits for any business with multiple entities:
Health: Consolidated cash flow will show you the true health of the business as a whole. For example, you can see total income coming in and going out for all businesses combined. This information allows you to see if your business is making money or not.
Confidence: For example, growth and expansion is an arduous process, especially if you have to convince all stakeholders that the decision to expand will be beneficial to the business.
Creating a consolidated cash flow statement can be useful to demonstrate that the entire portfolio has enough money flowing in to sustain itself during this process.
Transparency: It isn’t easy to ensure the financial health of a parent company without one of these statements. For example, three businesses may be making $1 million in profit each, and one is losing $5 million.
Looking at each individual business can be misleading because you have three very strong entities but one that is in the negative and consumes all of the profits. A consolidated cash flow statement provides transparency into the true financial health of the business.
Whether you plan on seeking investors or just want to make smarter business decisions, a consolidated cash flow statement can be beneficial. Knowing the true financial health of your parent company will allow you to make smarter decisions on financing and whether or not to keep certain subsidiaries operational.
Detailed Process of Consolidation
It’s much easier to create a consolidated cash flow statement using software or an app rather than doing all of the calculations by hand. You’ll need to do the following:
- Create a cash flow statement for just the parent company.
- Create a cash flow statement for each subsidiary.
- Go through the statements to make adjustments for intercompany transfers and sales.
- Add each cash flow statement into a new consolidated statement.
- Add the adjustments worksheet that includes all of the adjustments for transfers and sales to your subsidiary businesses.
Once done, you’ll have the data to finish up your consolidated cash flow, which will show you the total inflows and outflows of the business. For many parent companies, it’s easy to create a consolidated statement when you have few intracompany sales or transfers.
However, if you remain meticulous and work through each of the line items and make adjustments for them, you’ll end up with a highly accurate, consolidated cash flow statement.
Working with an accountant or using an app will improve the accuracy of your statement.
What’s Included in a Consolidation?
Consolidation will include a lot of pertinent data, but it’s crucial that you have majority ownership of the businesses in the entity. Adjustments will be made for sales and transfers, and net effect adjustments must be made in this case. To run a consolidated report, it’s crucial to have complete financial data of all entities, such as anything related to income and expenses.
A cash flow statement has many forms, and one of them is the consolidated form. When you have multiple businesses under one umbrella company, it makes sense to consolidate them into one to have an overview of the financial health of the entire organisation.
Of course, you can also run a cash flow report for each business individually, and this is recommended to see the financial health of each operation.
However, if you expect a certain business to take a few years to grow, it may make more sense to consolidate your statements. Through consolidation, you’ll have an overview of data to ensure that you can continue your operations without needing additional outside funding.