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How to produce a cash flow statement


For most businesses, managing their incoming and outgoing payments can be difficult. However, a cash flow statement can really help organise, manage and prepare for your annual finance activities.

A cash flow statement, as opposed to a cash flow forecast, outlines the money coming in and out of your business over a giving period of time. It is usually conducted year on year to help budget and help the business understand when it will be making profits. But it’s important to review throughout the year, either weekly or monthly, to make sure you’re always on the right track.

A cash flow statement can be an integral tool in ensuring that your company is running efficiently at all times, even when finances aren’t looking positive. It gives you an overview of your financial health.

What is included in a cash flow statement?

Your cash flow is a snapshot of your business bank account. It looks at when money comes in, and when money comes out. Therefore, it does not include non-cash financial transactions or any assets or liabilities.

There are two types of cash flow statements:

  • Indirect: An indirect cash flow statement starts with net income and takes away any accounts payable, expenses or depreciation and then adds on any accounts receivable and inventory.
  • Direct: A direct statement of cash flow simply lists the cash received from customers and cash paid to employees and suppliers.

An indirect cash flow is more common amongst businesses because it gives you a better financial picture overall. It’s also simpler for businesses to get their heads around. However, a direct cash flow is normally preferred by the International Accounting Standards Board (IASB).

What do you need to prepare?

To prepare your statement of cash flows, it is always useful to have your balance sheet and income statements to hand. This will help you to get a better understanding of what costs are coming in and out of the business.

How to structure your cash flow

When you’re starting with your net income, a business will then list all their incomes and expenses.

Operating cash flow: this includes any cash spent from any operating expenses, such as your day to day expenses. For example, taxes, rent, insurance, payroll. It can also include depreciation.

Investing cash flow: You then need to include any investments made to your business such as equipment, bought premises or any other long-term assets. This includes buying and selling of any property, plant or equipment.

Financial cash flow: Finally, an overview of other financial activities such as new funding, bonds, business loans or dividends.

It’s also important to note that any sales made where the payment has not yet been received shouldn’t be included in that particular cash flow statement. You need to be aware that your cash flow is ONLY associated with actual cash coming in and out during that period. Along with any cash equivalents such as bank deposits, cheques or overdrafts.

The direct method doesn’t take into account any depreciation expense or start with net income.

What to do once your cash flow is produced

Your cash flow statement is there to help you with your business plan. A negative cash flow can highlight areas where you need to cut costs, whereas a positive cash flow can mean you can make new investments. Either way, it is a useful tool to help you analyse the health of your business and to start solving any cash flow problems.

It can also demonstrate places where you need to adjust your financial decisions. For example, your operating costs may be more than your incoming sales, which can help to adjust your strategy. Cash coming in from operating activities that is higher than net income, is ideally what you want to be seeing.

Cash flow statements are also useful tools to help get new investors as well as satisfy any current investors. They can see a general overview of performance and understand the company’s position.

Preparing a cash flow statement can seem like a daunting task, but if you’ve already put together your balance sheet and income statement, you’ve done most of the work. Your cash flow is a key financial statement that can really help give you a better overview of your business.

Carl Faulds By Google+ |