Cash flow statements, also called statement of cash flows, are a powerful accounting tool. In addition to helping business owners pinpoint where their money is going, they also give insight on whether there’s room to cut costs or expand. Additionally, they can serve as resources for banks and investors, showing the success of a company to help a business receive more funds for future expansions.
Despite the complexities of cash flow statements that make some people and business owners nervous to utilize them, they’re worth mastering so a lack of one doesn’t set you or your business back.
In this guide, we’ve outlined everything you need to help you prepare a simple cash flow statement.
What’s a Cash Flow Statement?
A cash flow statement (CFS) is a report that summarizes the amount of cash that is coming into and leaving a company. The CFS is set in place to determine how well a company is managing its debts as well as incoming funds.
These are the business activities a CFS should display:
Money that’s coming in from operating activities incorporates profits from the company selling its goods and services. Interest and dividends need inclusion here too. Payments from a company’s operating activities include payroll costs like benefits, salaries and employment taxes. Other payments will include money that’s sent to vendors and suppliers. Not to mention, the funds used for monthly bills like rent, insurance or utilities.
Funds that come into the business from investment activites activities are:
- Sales of business assets (not inventory)
- Payments from loans
- Credit that the business issued
Investing activities are also other types of sales that aren’t part of the business’ normal day-to-day activities. The funds that are going out would be things like capital equipment and loans the business makes.
The money coming in from this category is money that’s borrowed along with the proceeds from selling the company’s securities. They are the company’s stocks, bonds, and commodities.
The money going out is a reflection of debts and dividend payments.
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What’s The Purpose of a Cash Flow Statement?
The cash flow statement gets used in a couple of different ways. It can be a point of reference to help investors understand how a company’s operations are going. This includes factors like where the money is coming from and how it is being spent.
A CFS is important because it gives investors a clear view of how profitable and solid the company is. On the other hand, creditors will use the CFS to understand how much liquidity (cash) is in the company for it to pay debts and continue its operations.
Cash Flow Statement Example
Types of Cash Flow Statements
A CFS can be set up in one of two ways: direct method statements or indirect method statements.
A direct method cash flow statement tracks specific actions. These will be both inflows (receipts) and outflows (payments) from operating activities. With this method, the money that gets spent is being subtracted from the money that has been received.
Most people find the indirect method to be more difficult to work out. In short, it begins with the net income. Then it factors in numbers to account for depreciation (decrease in value.)
How to Make a Simple Cash Flow Statement
Cash flow statements can be difficult to generate. Yet, they don’t have to be. There are ways to simplify this process while alleviating stress. Here’s how it’s done.
The first and most important step of generating a simplified cash flow statement is collecting the necessary data. The data will come from the company’s expenses in the three activities categories listed above (i.e. operating activities, investing activities, and financing activities).
To make the information easy to read, input it into a comparative balance sheet. The sheet should consist of three separate columns:
- One column will have account titles and other descriptions like net income, depreciation, dividends paid, etc.
- The second column will have dollar amounts for each transaction.
- Then, the third will have plus or minus symbols to show whether the transaction was an inflow or outflow.
This method will work well regardless of how the data gets inputted. You can choose to create your cash flow statement by hand or use accounting software. The most important factors to consider when making this decision are that your cash flow statement is easy to get to and change and it’s in a secure location where it is also backed up.
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Updating and Reviewing the Cash Flow Statement
Once a cash flow statement is set up, it shouldn’t get forgotten about. This is a document that should not only have revisions often, it should be updated and reviewed often.
When to Update the Cash Flow Statement
It’s a good rule of thumb to update the projections whenever something happens within the company that changes its cash flow. So, if an invoice is being paid out today, the cash flow statement should also get updated today. This makes staying on top of the company’s funds much easier, instead of coming into a position where you have to play a stressful game of catch up. That doesn’t just add stress to anyone handling the accounting. It makes it easier to make mistakes or even miss and forget about transactions.
Reviewing the Cash Flow Statement
You have to stay on top of your cash flow statement. Review it at least once a week. This will involve looking at new transactions. Keep an eye out for funds that are pending until they come into or leave the business’ bank account.
For example, when an invoice gets sent out, this should get updated onto the cash flow. Adding it on doesn’t mean that the money has gotten processed into the company’s bank account. It just means it’s expected. Let’s say it takes three days for that money to actually come in. That time period is worth noting because it will help your business forecasting process become more accurate down the line.
Another example is if there is a customer who faithfully pays their invoices late. Let’s say they have 30 days to make the payment, but they usually pay at the 45-day mark. Maybe a charge for a late payment will now get tacked on to their invoice. This is information you’ll want to always include.
The more accurate cash flow statements are, the better a business owner knows how to manage their funds.
Toward the end of every quarter, you should set aside some time to review what’s happened during that quarter. Not only is this helpful with figuring out what expenses are coming up, it will help you when it comes to predicting future revenue.
Having enough insight to predict your company’s future with a pretty good amount of accuracy has its benefits. It can help in making major business decisions. Like is there enough work or money to hire a new employee or is it necessary to place a larger order with your vendor.
Benefits of a Cash Flow Statement
There are plenty of methods you can use to determine how your business is performing. This includes customer relationships, the company’s investments and other assets. But nothing speaks as loudly or even more accurately as cash when you put your performance under a microscope. While other aspects are finicky, cash is a solid, measurable way to judge a company’s value.
Even if it isn’t your personal favorite way to make these determinations, it’s the universal way. Cash comparisons are what investors, creditors and partners like to see. Put simply, positive customer testimonials, for example, are great and they should definitely make you and your staff happy. But an investor won’t see its significance the way you will. The investor will want to know how much revenue those customers who left those positive testimonials produced.
It’s Time to Get Started
There’s no better time than the present to take control of your business and your future by managing your finances with a deeper purpose. It’s time to get started on your cash flow statement.
If you’ve found yourself in a position where even our simple cash flow statement is too time-consuming, you might want to consider outsourcing. A trusted accounting firm can help you keep a hold of your funds and understand ways to increase your bottom line.
Contact us. We’d love to hear about your business goals and see how our accounting can help you meet them.