What is a Cash Flow Statement? Plus Template

A cash flow statement, along with the balance sheet and income statement, is one of the primary financial statements used to measure your company’s financial position. It tracks the cash inflow and cash outflow of cash from operating, investing, and cash flow from financing activities during a given time period.

The term 'cash' refers to both cash and cash equivalents, which are assets readily convertible to cash. This financial statement provides relevant information to assess a business’s liquidity, quality of earnings, and solvency.

What is a Cash Flow Statement?

A cash flow statement is a financial document typically used to understand the solvency of your business. When combined with other financial statements, it can give you a clear perspective on the financial health of your small business.

Your company may have enough revenue to appear profitable, but slow collections of invoiced sales can impede your ability to meet your current financial obligations. Delayed payments to employees, suppliers, and other creditors can be massively detrimental to your business, so to understand your cash flow over a certain period of time, you need to create a cash flow statement.

Looking back over a specific period of time, typically the last month or last quarter, enables you to look forward to the next period and to ensure you have the funds on hand to pay your bills.

In order to complete the cash flow statement template, here are the most essential details to know:

How to Create a Cash Flow Statement

In order to fill out a cash flow statement easier, you will need your most recent income statement and balance sheet.

You can think of your business’s cash flow like the waves of an ocean, with revenue washing in and payments for expenses flowing out. A picture of cash flow is not easy to capture because the ebb and flow of money in your business is constantly changing. Nonetheless, you need a solid grasp on your cash flow at all times so you can spot trends in cash management and keep your company solvent.

The cash flow statement shows changes in your cash on hand, including cash in your bank account and short-term investments that you can easily convert to cash.

Cash flow statement examples might reflect activities such as:

Operating Activities: Inflow from operating activities includes revenue from selling products and/or services, interest and dividends that the business receives, and other cash receipts. Outflow from operating activities includes payroll costs (wages, benefits, and employment GST), payments to suppliers and suppliers, overhead costs (like rent, utilities, and insurance), income taxes and other business taxes, and other operations-related cash payments.

Investing Activities: Inflow from investment activities includes sales of business assets other than inventory, payments received from loans that your business made, and other income not generated by the normal course of business. Outflow includes purchases of capital equipment and loans that you make.

Financing Activities: Inflow reflects money that’s borrowed and the proceeds from the sale of your company’s securities. Outflow includes your debt service and dividend payments.

To create a cash flow statement manually, select a time period and review your income and expenses in each of the three activities discussed above. Use a self-created spreadsheet or template to organise your data into a cash flow statement. Essentially, your entries show cash in and cash paid out each month for the time period that your cash flow statement covers.

Alternatively, you can easily create a cash flow statement based on an accounting system such as QuickBooks. Since you’ve recorded your income and expenses on a regular basis, your accounting software has the information it needs to generate a cash flow statement automatically without the need for you to input each item of income or expense from your business activities.

What are Cash Equivalents?

Cash equivalents appear as assets on a balance sheet, and include cash along with liquid investments you can quickly convert into cash.

Money in your savings account is considered cash, while the funds in your money market accounts or government bonds are cash equivalents. Generally, cash and cash equivalents don’t change much in value.

For instance, the value of a Inventory may fluctuate wildly, but short-term treasury bills tend to yield very modest gains. Even though money market accounts usually have higher rates of return than most savings accounts, they also result in modest changes to the overall value of your assets.

Cash & Cash Equivalents

Having cash and cash equivalents on your balance sheet shows investors or lenders that your business is financially healthy. That way, if your revenues take a dive, you can still stay on top of your bills and other short-term liabilities.

On the other hand, having too much cash or cash equivalents on hand can be a sign that you’re not taking full advantage of your liquid assets. To save money in the long run, you may want to use cash to pay down high-interest debts, for example.

The amount of cash or cash equivalents your business needs varies depending on your industry, your objectives, and how much debt you have. However, as a general rule, you should have enough cash or cash equivalents to cover three to six months of business expenses.

Direct vs. Indirect Method

There are two different methods used to create a cash flow statement: the direct method for direct cash flow statements and the indirect method to create an indirect cash flow statement. The difference between the two methods only affects the cash flow from the operations section. There is no difference in reported cash flows for the investing or financing section, regardless of which method is used.

Cash Flow Statement Direct Method

This method deducts cash out from cash in by focusing on cash inflows and cash outflows of cash from operating activities.

Receipts under the direct method include cash collected from customers and cash received from interest and/or dividends.

Disbursements under the direct method include cash paid to suppliers for goods, cash paid to employees for services, and cash paid to creditors for interest and tax payments.

How to Use the Direct Method:

Start by listing cash paid and received. Make sure to include line items for cash paid to employees, suppliers and interest, and then include cash from customers.

Cash Flow Statement Indirect Method

The indirect method is slightly more complex. It uses your company’s net income and then calculates depreciation. Non-cash items that are taken into account include depreciation, amortisation, account receivable loss provisions, and losses from the sales of fixed assets.

The net income line items are also adjusted for changes in the ending and starting balances of current assets, with the exception of cash. The same type of adjustments must be made for changes in current liabilities.

How to Use the Indirect Method:

Start by determining your operation’s net income and then converting the accrual net income into operating activity cash flows.

Some of the line items on a typical indirect method cash flow statement include any increase in accrued expenses payable, depreciation expense, decrease in accounts receivable, and deducting increases in inventory.

Forecasting with a Cash Flow Statement

The cash flow statement is an important forecasting tool for business. Since all inflows and outflows are detailed as line items, it’s easy for you to identify where problems or opportunities occur. You can locate major issues by category, whether operations, investing or financing. The details of the overall problem or opportunity can be found by reviewing each line item. From that point, you can estimate how things might change over the next few quarters or how long it may take for a problem to be fixed. Since all of the major sections of the cash flow statement point back to cash balances, this financial report serves as a business’s early warning system.

Always evaluate your cash position before major decisions. This includes expansion, research, and development, major purchases, or equipment upgrades. Use a bank reconciliation to check current cash available, pending outstanding payments, and deposits in transit, because the current balance of your cash account may materially change due to pending transactions.

Free Cash Flow Statement Template

Free cash flow takes into account cash flow from operations and the cash required to pay for capital expenditures (CAPEX). The formula is (cash flow from operations) minus (capital expenditures to support current operations).

Well-managed companies plan for capital expenditures, which may include investments in machinery, equipment, and other long-term assets. A chain of restaurants, for example, must eventually replace ovens, refrigerators, and furniture. The cost of replacement should be included in the restaurant chain’s annual budget.

If the restaurant can generate more cash from operations than is needed to pay for capital expenditures, the company has some options. The extra cash might be used to pay a dividend to investors, or it can be retained in the business to expand operations.

A successful business must manage liquidity and solvency. Liquidity refers to your business’s ability to generate enough current assets to pay current liabilities. Solvency has a long-term focus. If your company can produce cash inflows over the long-term, you can pay for capital expenditures in the future and repay loan balances.

The statement of cash flows and the free cash flow calculation are tools you can use to manage your business. Once you start using these tools, you need to make changes to improve cash inflows.

Understanding your company’s cash flow is critical to maintaining a positive cash flow. It’s important to identify the key cash drivers for your company’s operations, as well as understanding how the current period (i.e. month, quarter, or year) compares to a prior period. This template helps you outline those drivers by comparing the current and prior accounting periods in detail. A cash flow statement can provide a clearer picture of your company’s ability to pay creditors and finance growth.

Download this cash flow statement template no matter what type of business you have. It should be customised to include the specific types of cash flow activities that apply to your company. To fill out this spreadsheet, enter the applicable values in their respective cells. The total amounts automatically populate based on the embedded formulas. An example cash flow statement is also included to help guide you through the process.

Cash is essential for keeping your company afloat. Make sure you have a good understanding of where your money comes from and when, and where your money is spent so that you can meet your financial obligations.

Use a cash flow statement as well as cash flow projections to clarify your company’s position on cash. If you have any concerns about creating or understanding your cash flow statement and projections, work with a CPA or other knowledgeable financial specialists. Improve your cash flow with invoices, payments, and expense tracking. See how much cash you have on hand with QuickBooks.