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A cash flow statement is a financial statement that shows the flow of cash into and out of your business during a specific period of time. The cash flow statement shows how much cash a company receives and spends on operating, investing, and financing activities. Using this financial statement, you can see whether a company is generating more cash than it is using.
Tracking your company’s cash balance can feel like an overwhelming task—but it doesn’t have to be. Preparing a cash flow statement on a regular basis gives you a clear, organized look into your cash flow position.Along with your income statement and balance sheet, a cash flow statement, also known as a statement of cash flows, is one of the three major financial statements in business accounting.
Periodically reviewing your cash flow statement is essential to making sure your company is prepared for both good times and rough periods in the future. Here’s what you need to know about preparing and analyzing your cash flow statement to best inform day to day and long-term decisions about your business spending and general operations.
Performing a cash flow analysis allows you to track changes in your business’s cash balance during a specific period by calculating cash inflow versus cash expenditures.
This process will help you to identify patterns, not only around how much money is coming in and going out of your business, but also for what and when—enabling you to plan ahead and avoid being short of cash when bills and payroll are due.
Your cash flow statement will also give you a snapshot of your business’s financial health: whether or not your everyday operations (without outside help from investors or loans) are generating enough money for the business to sustain itself. This is your company’s liquidity—an important factor for monitoring for the longevity of your business.
It’s smart to run a cash flow statement on at least a monthly basis. But if you’ve had recent cash flow problems, it may be worthwhile to track your cash flow weekly or even daily for awhile. The more frequently you update your cash flow statement over time, the more apparent patterns of cash flow in your business will become, and the better you’ll be able to predict (and prepare for) leaner times.
Remember that a cash flow statement is just that: a statement of how much cash your business has at its disposal at a given time. It’s distinct from a profit and loss statement, in that it shouldn’t include non-cash financial transactions. It’s also different from a balance sheet, which focuses on assets and liabilities.
The cash flow statement is basically a snapshot of your business’s financial health. A statement of cash flows can be presented in two formats:
In this article, we’ll focus on the indirect method because it’s much more commonly used. No matter which format you use, the cash flow statement should be divided into three parts: cash associated with operating, investing, and financing activities. A healthy business drives their cash flows from operations and reinvests capital. This means you want to see net positive cash inflows from operations and cash outflows for investing activities.
Here’s the right cash flow statement format:
Remember, the cash flow statement is only concerned with cash and cash equivalents (e.g. checks, bank accounts, and U.S. treasury accounts). For example, if accounts receivables goes up, that means sales are up, but you haven’t received cash at the time of sale. As a result, accounts receivables will be deducted from your net income and actually get treated as a cash outflow on your cash flow statement. Conversely, an increase in accounts payable will show up as an inflow on your cash flow statement because you haven’t paid for those goods or services yet.
The final line on your cash flow statement shows your net cash balance, the amount of cash your company has on hand during the reporting period. That should be a positive number if your business is generating more cash than it is using.
Here is an indirect cash flow statement example, with $150,000 net income as a starting point:
Increase in Accounts Receivable
Increase in Inventory
Increase in Accounts Payable
Decrease in Prepaid Expenses
Decrease in Accrued Expenses
Net Cash Flow from Operating Activities
Increase in Investments
Increase in Property, Plant, and Equipment
Sales of Property, Plant, and Equipment
Net Cash Flow from Investing Activities
Repayment of Business Loans
New Business Loan Received
Net Cash Flow from Financing Activities
Net Cash Balance
The sample company had a positive net cash balance at the end of the first quarter in 2019. Most of the positive cash inflows came from operating activities, which is a good sign. The company also made some good long-term investments in plant, property, equipment. The business doesn’t seem to be borrowing too much money.
Note that although depreciation appears on the cash flow statement, depreciation is not a source of cash for a business. It’s listed on the indirect cash flow statement to adjust net income, which is reduced by depreciation expense on the income statement.
To get even more out of your cash flow statement, try common size analysis of your financial statements. With common size analysis, you’ll be able to see what percentage of net revenue is made up by each line item in your cash flow statement. This will allow to make good decisions about where to increase spending and where to cut back.
By now, you should understand all of the different numbers on a cash flow statement. For more guidance, check out this video from Fundera contributor Seth David:
To simplify the process of preparing your cash flow statement, use accounting software such as QuickBooks Online. Accounting software will make the required calculations for you, and you can schedule weekly or monthly cash flow statements. In your accounting software’s cash flow analysis feature, start by entering your company’s net income and cash balance at the beginning of the tracking period. This number should include all of the company’s bank account balances as well as any petty cash.
For each category, mark inflows as positive and outflows as negative. Double check that you’ve entered all your expenditures and incomes for the analysis period. The software should add everything up, category by category, and then total the balance of the three categories. You’ll also be able to see your final cash balance. Subtract your starting balance from your ending balance for the period to determine whether your cash flow over the statement period in question was positive or negative.
With software like QuickBooks, you can easily compare cash flow for different time periods. This is especially useful when discussing company goals and growth targets or when planning big investments.
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Now that you have a cash flow statement, how do you use it to better inform spending and sales decisions?
Just looking at whether your cash flow during the analysis period was positive or negative is a good start. If you see a pattern of negative cash flow over several months, it’s likely time to implement cost cutting or revenue building measures to work toward a positive cash flow. Consider raising prices, cutting down excess inventory, changing marketing tactics, or adjusting your staffing schedule to realign your cash flow in a better direction.
Figures from your cash flow analysis can also help you measure other areas of your company’s financial health. For example, look at the ratio between your operating activities cash flow (day-to-day cash expenditures and income) and your net sales to see how much cash from sales is going into your company’s pocket rather than to overhead. Ultimately, you want your cash flow to increase as sales increase, meaning that your cash profit from sales is holding steady.
Once you’ve mastered the basics of tracking and analyzing your company’s cash flow, you might want to investigate some more complex figures, such as your company’s free cash flow—an important number for venture capitalists and others who may consider investing in your business. These higher level cash flow analytics can give you a bigger-picture view of your company’s finances.