ULTIMATE CASH FLOW GUIDE

Chapter 4: Business Cash Flow Statements

ULTIMATE CASH FLOW GUIDE

Chapter 4: Business Cash Flow Statements

Introduction

What is a projected cash flow statement?

A projected cash flow statement shows the difference between your company’s net cash inflows and outflows for a specific period of time.

Cash Flow Statement Basics

How do cash flow statements work?

Cash flow statements work by alerting business owners to potential gaps in cash flow before they happen. This enables you to prepare and apply positive cash flow management strategies like invoice funding, so you can avoid a cash flow crisis and continue growing your business.

Who uses a business cash flow statement?

As a small business owner or entrepreneur, you’ll use your cash flow statement often to ensure that you always have enough free cash flow to pay employees and suppliers, buy inventory and equipment, and otherwise invest in the success of your business. Your accountant, potential investors and loan officers might also request a copy of your business’s cash flow statement as it helps them evaluate your financial health.

Why do businesses use a cash flow statement?

Businesses use cash flow statements as a critical financial management and business planning tool. Cash flow statements are important because you need to know if, at any given point, you are going to have enough liquidity to pay for your current liabilities like payroll, inventory, capital assets and more.

What financial questions does a cash flow statement answer?

A cash flow statement primarily answers the question: “Will we have enough money coming into the business to cover what’s going out for this period?” If you see a cash flow gap in your future, your cash flow statement can also help you answer the question: “Where can we find the cash to meet those financial obligations?” For example, if you see that you are going to have a negative cash flow situation next week, but you have invoices out that could cover the gap that aren’t due until the week after, you can use a tool like invoice funding to create the cash flow to get you through.

How can a cash flow statement be useful in my decision making?

A cash flow statement can be incredibly useful in your decision making as it highlights both potentially hazardous cash flow situations, but also opportunities for your business to grow. It’s critical that you understand where and how cash is flowing into your business so you can put it to work in the areas that matter.

What are cash flow financing activities?

Cash flow from financing activities refers to the cash and cash equivalents coming into and going out of your business from the issuance of debt and financing. Issuing new stock, paying out dividend payments, and repurchasing stock from your shareholders are all examples of cash flow from financing activities.

Why is a cash flow statement important to investors?

A cash flow statement is important to investors because it helps them understand the financial health and growth potential of your company. If a potential investor sees consistently negative cash flow over time, they may question your ability to meet your financial obligations. On the other hand, negative cash flow from investing activities coupled with positive cash flow from operations might tell investors that your company is investing in its growth. Cash flow is just one aspect of your business investors will want to see, but it’s an important one. You can learn more about the different types of cash flow here.

Is a cash flow statement needed to get a business loan?

Most lenders and investors will want to see your cash flow statement as part of their evaluation of your business.

Who prepares the cash flow statement?

As a small business owner, you may not yet have the support of an in-house finance team. Thankfully, cash flow forecasting is fairly simple to do, so you won’t need to pay an accountant every time you want to see a cash flow statement. You can learn how to prepare them yourself in our Calculating Cash Flow section.

Where can I learn how to prepare a cash flow statement?

You can learn how to prepare a cash flow statement in our Calculating Cash Flow section.

What does a cash flow statement look like?

Your cash flow statement, or statement of cash flows, contains the following:

  • your company name
  • the date range being evaluated
  • your net income broken out across three categories:
    • cash provided by operating activities
    • cash provided by financing activities
    • cash provided by investing activities
  • adjustments to reconcile your income to the actual amount of cash flowing into the business, which might include accounts receivable, credit card payments in processing, taxes payable, etc.
  • your net increase or decrease in cash, measured over the term of the statement period

 

This shows you whether your cash flow over a specific period was positive or negative. If you would like to use cash flow projections to anticipate cash flow in future, try cash flow forecasting.

Cash flow statement vs balance sheet: What's the difference?

A cash flow statement shows the difference between your cash inflows and outflows over a specific period of time. Your balance sheet is a statement of your assets, liabilities and capitals at a specific point in time.

Cash flow statement vs budget: What's the difference?

Your business’s cash flow statement shows how much money flowed in and out of your business over a specific period of time. A budget tells you the amount of money you can spend over a period of time, given your revenue, assets and liabilities.

Cash flow statement vs general ledger: What's the difference?

Your general ledger is your company’s main accounting record and consists of all of your numbered accounts, typically categorized by assets, liabilities, owner’s equity, revenue and expenses. Your cash flow statement is a report that shows your cash inflows and outflows over a specific period.

Does the tax agency require a business cash flow statement?

Yes. Your business’s cash flow statement is a key financial document (alongside your balance sheet, income statement, and statement of owner’s equity).

Is a cash flow statement mandatory for small business?

Yes. Your cash flow statement is the official record of cash and cash equivalents flowing into and out of your company.

When should a business update its cash flow statement?

If you are using an automated bookkeeping solution like QuickBooks or Xero, your cash flow statement will be updated each time you run a new report, so long as you have been inputting all transaction data. You might run your cash flow statement monthly to review with your executive team or financial planner/accountant, but can run this report as often as you’d like to see it. Don’t confuse your cash flow statement with a cash flow forecast; you’ll want to see cash flow projections often so you can make informed decisions for your business.

Where can I learn how to read a cash flow statement?

Working your way through our Ultimate Cash Flow Guide will help you become comfortable with the terminology and accounting principles necessary to read a cash flow statement.

Flat lay of glasses, a cup of coffee, a laptop with a cash flow statement on the screen, and an Apple mouse

Cash Flow Statement Template

Cash is King, and understanding how and when that cash is going to be available to your growing business is mission critical. Invoice payment takes an average of 61 days in North America, according to the 2017 edition of the Atradius Payment Practices Barometer. What’s more, 92.6% of businesses reported late payments from their customers in 2017.

While cash flow forecasting is an effective tool for predicting a potentially negative cash flow situation before it becomes a crisis, your cash flow statements give you a concrete cash flow history over time. Not only are they an important business planning tool, but your cash flow statements tell potential investors (and those interested in acquiring your company) important stories about the long term health and viability of your business.

What is a cash flow statement template?

A cash flow statement template enables you to more quickly and accurately prepare cash flow statements in manual bookkeeping operations. If you’re using accounting software like QuickBooks or Xero, cash flow statements are one of the reports you can generate automatically using the transaction data you’ve already input in the system. You can also find pre-made cash flow statement templates online. Here’s an example of what a cash flow statement looks like in Google Sheets:

cash flow statement example

How can you prepare a cash flow statement if you aren’t yet using automated bookkeeping software? Follow these 5 simple steps to get started:

  1. Record your cash flow statement date range.
  2. Input your cash inflows and outflows from each of the three major types of cash flow activities: Operating, Investing, and Financing.
  3. Calculate the total for each type of cash flow activity, then add these three figures together to arrive at your Net Cash Flows.
  4. Record your cash balances at the beginning and at the end of your cash flow statement date range to arrive at your Net Change in Cash for Period.
  5. Compare the sum of your Net Cash Flows with your Net Change in Cash for Period. These sums should be equal.

Where can I find a cash flow statement template?

FundThrough offers a free, downloadable cash flow statement template for Microsoft Excel and Google Sheets to get you started. You can either download it to use with Excel desktop, or edit it online with Google Sheets.

Want to learn more about improving cash flow to grow your business? Use our Ultimate Cash Flow Guide to help you master this critical aspect of succeeding in business and growing your company.

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