What Is a Cash Flow Statement?
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.
Why Do You Need to Run a Cash Flow Statement?
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.
What Does a Cash Flow Statement Include?
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:
- Indirect Cash Flow Statement – The starting point of an indirect cash flow
statement is net income, and then you make adjustments for depreciation, accounts receivable, inventory,
accounts payable, and accrued expenses to arrive at cash flow from operating activities.
- Direct Cash Flow Statement – Rather than starting with net income, a direct cash flow
statement lists the cash amounts received from customers and paid to employees and vendors.
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:
- Operating activities -This category covers your day-to-day business income and
expenses, such as income from sales and paid receivables. outflows include payroll, payments to suppliers,
insurance, and business taxes.
- Investing activities – Investment outflow covers bigger-ticket items like purchase
of equipment or real estate. These are long-term investments of assets in your company, rather than
nitty-gritty daily purchases like supplies or goods for resale. If you rent out or sell equipment or real
estate assets, those proceeds count as investment inflow in your cash flow analysis.
- Financing activities – Here, you’ll track incoming capital from equity fundraising
or business loans as inflow. Any payments you make on a loan during the reporting period or dividends paid
to investors will count as outflow in this category.
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.
Cash Flow Statement Example
Here is an indirect cash flow statement example, with $150,000 net income as a starting point:
Sample Cash Flow Statement
Qtr. Ending Dec 31, 20XX
| Cash Flow Statement Item | Value |
|---|
Net Income |
$150,000
|
Depreciation |
$50,000
|
Increase in Accounts Receivable |
($30,000)
|
Increase in Inventory |
($10,000)
|
Increase in Accounts Payable |
$30,000
|
Decrease in Prepaid Expenses |
$10,000
|
Decrease in Accrued Expenses |
($10,000)
|
Net Cash Flow from Operating Activities | $190,000 |
Increase in Investments |
($50,000)
|
Increase in Property, Plant, and Equipment |
($100,000)
|
Sales of Property, Plant, and Equipment |
$20,000
|
Net Cash Flow from Investing Activities | ($130,000) |
Net Cash Flow from Investing Activities |
($130,000)
|
Repayment of Business Loans |
($25,000)
|
New Business Loan Received |
$50,000
|
Interest Expenses |
($5,000)
|
Dividends Paids |
($50,000)
|
Net Cash Flow from Financing Activities | ($30,000) |
Net Cash Balance | $30,000 |
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.
How to Prepare a Cash Flow Statement With Accounting Software
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.
Getting the Most Out of Your Cash Flow Statement
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.
