How to Create a Business Cash Flow Statement

Last Updated March 29, 2024

Every business owner needs to have a good understanding of the three essential financial documents: profit and loss statement, balance sheet, and cash flow statement. A profit and loss statement details income and expenses over a certain period, and a balance sheet details your assets and liabilities, but what exactly is a cash flow statement?

Before learning how to create one, it is essential to first understand the meaning of cash flow in business, which – generally – shows how much money is coming in vs. how much money is moving out. Proper cash flow management is crucial and a good indicator of a business’s performance, which is why the cash flow statement is one of the three financial statements that are mandatory forms for your business.

What Is a Business Cash Flow Statement?

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, plus it makes adjustments to the information recorded on the income statement.

While your income statement will not tell you how much cash you have on hand at a specific point, your cash flow statement will. This will ultimately provide you with helpful information regarding how to handle your expenses, particularly if you run a small business.

A cash flow statement might be more beneficial for small business owners than a profit and loss statement as it helps to better figure out your existing financial situation (keep in mind, though, that there is a difference between statement of cash flows vs. a cash budget).

Why Do I Need to Create a Cash Flow Statement?

Poor management of cash flow causes 82% of business failures, highlighting the importance of staying on top of it.

A monthly, quarterly and yearly cash flow statement can show current or future cash flow issues. While your business might be profitable in the long run, there may be times when you are short on cash and have trouble paying your bills. This issue can happen with companies that do a lot of invoicing.

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 four main reasons that business owners – especially small business owners – should draft a statement of cash flows:

1. It will reveal liquidity. Your liquidity indicates how much operating cash flow you have in case you need to use it.
2. It will show your business’s changes in assets, liabilities and equity in the forms of cash inflows, outflows, and cash held.
3. It can help predict your future cash flow when you’re creating a cash flow model, helping create projections and aiding in your long-term business plans. Having a cash flow statement will also be necessary if you’re planning on securing a loan or line of credit.
4. By making a statement of cash flows, you’ll be able to quickly detect if and how you’re in a period of negative cash flow, which you should aim to avoid (although most small business owners will experience this at some point).

How to Make a Business Cash Flow Statement

Now that you have the background information you need, here’s a step-by-step process for how to make a cash flow statement:

1. Record Your Opening Balance

Before composing your cash flow statement, you should document your 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).

2. Calculate Cash Inflows

Next, 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.

3. Determine Cash Outflows

Once you have your cash inflows, you can move onto determining 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.

4. Subtract Cash Outflows from Your Opening Balance and Cash Inflows

Finally, 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, which will also be your opening balance at the start of the next month.

Breaking Your Cash Flow Statement Down Further

You might need to break finances down more specifically, which you can do by separating finances into three categories: operating activities, investing activities and financing activities. The operating activities include your cash earned and spent, along with 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.

The financing activities section will cover a wide array of things. These include transactions with stockholders, creditors, investments, and invoice factoring companies. This section addresses cash earned or spent in the course of financing your company.

Lastly, it’s important to not only regularly overview your cash flow statement, but to analyze all three essential financial statements in unison. This will give you the clearest picture into your business’s performance and direction.

How Do You Figure Out Your Cash Flow?

Essentially there are two ways to figure out your cash flow. The first way, which requires more work and organization but is the direct route, 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 statement of cash flows 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 readily available: 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 your statement of cash flows like a corporate checkbook that reconciles your income statement and balance sheet. It is not necessarily the main 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. However, a cash flow statement is an important business accounting task and organizational tool that tracks finances, making it critical for all small business owners. Plus, seeing all of your finances laid out in a single document can demonstrate ways to improve your cash flow.