Why you need a cash flow statement
Cash is critical to your business's success. Here's how to prepare a cash flow statement.
Why you need a cash flow statement
Cash flow statements show you where your cash comes from and where it goes.
It's important to track the inflows and outflows of your business's cash so you can coordinate purchases and payments. If you're unsure of your cash flow, you risk spending money you don't have.
"There have been plenty of businesses that have been run profitably but have run out of cash," says Jerry L. Mills, founder and CEO of B2B CFO, a consultancy firm that helps small businesses with cash management.
Set your business up for success by tracking your cash flow carefully and preparing cash flow statements regularly.
How to prepare a cash flow statement
Your cash flow statement should consist of the following three sections and give an overview of the cash you spent toward and received from each component:1
Operating activities: This section summarizes the cash you earn for selling your goods and services in a given period. You should include your earnings before interest and taxes and adjust for non-cash expenses, such as depreciation.
Investing activities: This section covers cash transactions related to your business's investments, such as equipment, property, and other major assets. Profiting from renting part of your property would be a positive entry, while buying a new piece of equipment would be a negative entry.
Financing activities: This section accounts for external factors that affect your cash flow, such as loans and equity sales, which are sales of common shares of your company. If your business obtained additional financing, for example, you'd list it as a positive input. Paying off part of a loan would be a negative output.
1 "Cash Flow From Operating Activities (CFO)." Investopedia. (2015) http://www.investopedia.com/terms/c/cash-flow-from-operating-activities.asp
"Cash Flow From Investing Activities." Investopedia. (2015) http://www.investopedia.com/terms/c/cashflowfinvestingactivities.asp
"Cash Flow Statement: Analyzing Cash Flow From Financing Activities." Investopedia. (2013) http://www.investopedia.com/articles/investing/120613/cash-flow-statement-analyzing-cash-flow-financing-activities.asp
How to analyze a cash flow statement
Once you've created a cash flow statement, use it to see how well you're handling your cash and to gauge how your cash flow is affecting short- and long-term finances.
Analyzing your cash flow operating activities can help you answer questions such as:
Is my business generating consistent and sufficient cash versus revenue?
Am I making any ill-timed purchases or payments?
Are my investments generating or losing money?
Am I making progress on my loan repayment?
Once you've generated and analyzed cash flow statements regularly, you'll notice trends that can help you make decisions and improve your overall financial strategy.
When to prepare your cash flow statements
Preparing cash flow statements often is important for small businesses — especially those just starting out. One-time expenses can add up and change your cash situation quickly. So can last-minute emergency payments.
Prepare cash flow statements at least once a month if you're a new business owner.1 While you may be able to prepare them less frequently later, you'll only gain greater insight by keeping track of your cash flow carefully.
"If done properly, discussions around cash flow are a wonderful tool because they're not just about profitability — they help ensure that a company consistently has enough cash," says Mills. "That leads to less stress for the business owner and facilitates planning for more potential success."
1 "How to Prepare a Cash Flow Statement." Edward Lowe Foundation. (2015) http://edwardlowe.org/digital-library/how-to-prepare-a-cash-flow-statement/