Last Updated on December 14, 2021
What exactly is a cash flow statement? Before you can make one, it is essential to understand the definition of what a cash flow is. Cash flow is a company’s ability to generate revenue and the operational turnover of a business. The cash flow statement is part of the trifecta of financial statements that are mandatory forms for your business.
This regular financial statement records the amount of cash that comes into and leaves your business. A cash flow statement will examine the components of your business that affect cash flow. These include accounts receivable, accounts payable, inventory and credit terms.
The cash flow statement allows lenders and investors to see where your cash is coming from and how your company’s finances are managed. It differs from the other two financial statements in that it doesn’t show a business’s future incoming or outgoing money recorded on credit. The other two forms you will need to produce are the income statement and the balance sheet.
The cash flow statement makes adjustments to the information recorded on the income statement. The income statement will not tell you how much cash you have on hand at a specific point, as the cash flow statement will. This statement will provide you with great information about how to handle your expenses.
A cash flow statement is more realistic than your profit/loss statement and will help you to figure out your financial situation better. Keep in mind as well that a statement of cash flows vs. a cash budget are two different things.
Why Do I Need to Create a Cash Flow Statement?
A cash flow statement is necessary for several reasons. Poor management of cash flow causes 82% of business failures. A monthly, quarterly and yearly cash flow statement can show current or potential cash flow issues. While your business might be profitable in the long run, there may be times when you are on cash and may have trouble paying your bills. This issue can happen with companies that do a lot of invoicing.
Also, it is essential to understand that being profitable does not necessarily translate into a positive cash flow. This means that bringing in cash doesn’t equal making a profit and vice versa. There are three main reasons you need a cash flow statement. Consider your cash flow statement like a corporate checkbook that reconciles your income statement and balance sheet.
First, it will show your liquidity. Your liquidity indicates how much operating cash flow you have in case you need to use it. Next, it will show your business’s changes in assets, liabilities and equity in the forms of cash inflows, outflows, and cash held.
Lastly, a cash flow statement will predict your future cash flow. This statement helps create projections and will aid in your long-term business plans. This financial statement will also be necessary if you’re planning on securing a loan or line of credit.
What You Should Include in Your Cash Flow Statement
One way to compose your cash flow statement is by starting with an opening balance. The opening balance is the total cash you have in your bank account at the beginning of the month (if you’re making a monthly cash flow statement). Then you would calculate the amount of cash you have coming in. This total is what you expect to take in for the month. Include only the money you’re receiving, not your sales made.
Also include everything coming in from financing activities, investments and operations. Then, you can determine the amount of cash going out. Add and then enter the payments you expect to make for the month. Don’t forget about the bills that may be paid semi-annually or annually. Then you will subtract the cash going out from the total of your opening balance and money coming in.
The number that’s left is the amount of cash you will have left at the end of the month. This number will be your opening balance at the start of the next month. You can also figure out what to put in your cash flow statement per category. If you choose to do so, follow the instructions below.
You can break down a cash flow statement into three categories; operating activities, investing activities and financing activities. The operating activities include your cash earned and spent. The operating activities section records the typical cash movement in business activities, for example, sales or purchase of goods or services.
Your investing activities should show all transactions that include or concern the sale or purchase of long-term assets. For example, these activities can consist of purchasing new equipment or investing in other companies. Lastly, the financing activities section will cover a wide array of things. These include transactions with stockholders, creditors, investments, invoice factoring companies etc. This section addresses cash earned or spent in the course of financing your company.
How Do You Figure Out Your Cash Flow?
Essentially there are two ways to figure out your cash flow. The first, the direct route, requires more work and organization. It involves keeping a record of cash as it enters and leaves your business. You then use that information at the end of the month to prepare your statement.
The indirect way is where you would look at the transactions on your income statement. Then you backtrack to eliminate transactions that do not show cash movement. Either way you slice it, both methods of figuring out your cash flow involves astute bookkeeping.
Although it may seem that creating a cash flow statement with the three sections mentioned above is simple, tallying your company’s overall balance can be tricky if you make an error or omit transactions. To ensure that you don’t run into any issues, you will either want to use accounting software or choose to keep track of your cash flow in one of the three suggested templates available to you below.
If you choose to create your cash flow statement, you can use Microsoft Excel, Google Sheets or QuickBooks. These templates are either available in download or cloud-based format. They will ensure that you include all pertinent information and can do the calculations for you.
You may want to choose Microsoft Excel if you already have Microsoft downloaded. This route is comprehensive yet straightforward and can also be accessed via Excel online. If you wish to use a cloud-based format, Google Sheets is free with a Google account and boasts an automatic saving feature. QuickBooks is more detailed, with its own Excel spreadsheet so that you don’t forget any expenses or incomes.
What a Cash Flow Statement Does Not Tell You
As stated above, while using a cash flow statement is beneficial in several ways, it is essential to point out what it does not do. When looking at profitability, understand that this means both cash earned and non-cash items.
Consider the cash flow statement as a compressed checkbook for your company. It is not an indicator of the overall financial well-being of your business. The amount of cash you have may be significant, but many other facets go into your business’s entire financial condition. A cash flow statement is critical, as it is a piece of the finances you need to consider when owning a business.
More Accounting Resources
- How to Calculate Your Cash Conversion Cycle
- How to Do a Business Break-Even Analysis
- How to Do a Business Budget Analysis
- Accounts Receivable Aging Schedules
- Cash Flow Analysis Tips
- Cash Flow Models
- Debt-To-Equity Ratio Calculation
- Cash Flow Margin Calculation
Grey is the Director of Marketing for altLINE by The Southern Bank. With 10 years’ experience in digital marketing, content creation and small business operations, he helps businesses find the information they need to make informed decisions about invoice factoring and A/R financing.