Understanding your business’s cash flow is crucial for maintaining financial health and ensuring long-term success. A cash flow statement offers a clear view of how money moves in and out of your company, highlighting your ability to manage expenses and generate revenue. By using this financial tool, you can make informed decisions that promote growth and stability.

Table of Contents

1. What is a cash flow statement?
2. What are cash equivalents?
3. How to create a cash flow statement
4. Forecasting with a cash flow statement
5. Free cash flow statement template
6. FAQ

What is a cash flow statement?

A cash flow statement is a financial document that tracks the inflow and outflow of cash within your business over a specific period. It categorizes cash movements into operating, investing, and financing activities, providing insights into your company’s liquidity and financial performance. This statement is essential for assessing your ability to cover expenses, invest in growth, and maintain solvency.

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 are cash equivalents?

Cash equivalents are short-term, highly liquid investments that can be quickly converted into cash. Appearing as assets on a balance sheet, they include cash in savings accounts, money market funds, and investments like three-month Canadian Treasury Bills.

Unlike stocks, whose values can fluctuate significantly, cash equivalents maintain stable value and yield modest returns. For example, while money market accounts typically offer higher rates than savings accounts do, their impact on overall asset value remains minimal.

The ideal amount of cash or cash equivalents depends on your industry, goals, and debt levels, but these assets are generally seen as a sign of financial health to investors and lenders. They ensure a business can meet short-term liabilities even if revenue dips, demonstrating resilience. As a general rule, aim to have reserves covering three to six months of business expenses to maintain financial flexibility.

How to create a cash flow statement

Let’s say you own a small bakery and want to prepare a monthly cash flow statement. Here’s what you need to do:

1. Collect your financial statements

Start with a close look at your income statement and balance sheet. For example, your income statement shows you made $10,000 in sales and $6,000 in expenses last month. That means your net income ($10,000 - $6,000) was $4,000.

Your balance sheet, which is a record of your assets, liabilities, and equity, shows you started the month with $5,000 in cash.

2. Determine the reporting period

In this example we’ll look at how to prepare your cash flow statement on a monthly basis, but you could also choose to do so quarterly or annually.

3. Choose how to calculate operating activities

Operating activities include cash transactions related to your core business operations, such as revenue from sales, payments to suppliers, payroll costs (wages, benefits, and employment taxes), overhead costs (like rent, utilities, and insurance), income taxes, and other business taxes.

To calculate the operating activities on your cash flow statement, you’ll need to decide between the direct or indirect method. Both methods ultimately present the same net cash flow but differ in presentation and the level of detail provided.

Direct method: This entails listing all the cash you collected from your customers, the cash you paid to suppliers and employees, and the interest and income taxes you paid. Subtract your total cash payments from total cash received to calculate net cash flow. Here’s what that might look like:

Cash received

• Collected from customers: $9,000 (Some customers bought their baked goods on credit, so you didn’t collect the full $10,000 you made in sales yet.)

Cash paid

• Suppliers: $2,500
• Rent: $1,000
• Utilities: $300
• Income taxes: $400

Your net cash flow from operating activities: $9,000 - ($2,500 + $1,000 + $300 + $400) = $4,800

Indirect method: Start with the net income on your income statement, then adjust for changes in non-cash expenses and working capital, including accounts receivable, inventory, and accounts payable. Here’s an example:

Start with net income: $4,000

Add non-cash expenses (depreciation of bakery equipment): $500

Adjust for changes in working capital:

• Accounts receivable increased by $1,000 (money customers owe you), so subtract $1,000
• Inventory decreased by $500 (you used up ingredients), so add $500
• Accounts payable increased by $800 (your debts to suppliers), so add $800

Your net cash flow from operating activities:

$4,000 + $500 - $1,000 + $500 + $800 = $4,800

4. Calculate investing activities

Inflows from investment activities include sales of business assets other than inventory, payments received from loans your business made, and other income not generated by the normal course of business. Outflows include purchases of capital equipment and loans you receive.

To calculate net cash flow from investing activities, subtract the cash payments you made for investments from the cash you received for selling your investments:

• You purchased new kitchen equipment for $2,000, so subtract $2,000.
• You didn’t sell any assets, so there’s no cash inflow.

Your net cash flow from investing activities: - $2,000

5. Calculate financing activities

This category includes all cash transactions made for financing, including money borrowed, cash received from issuing stock, and cash spent on repaying debt or buying back stock. To calculate net cash flow from financing activities, subtract your cash payments from cash receipts:

• You took out a small business loan for $3,000, so add $3,000.
• You made a loan payment of $1,500, so subtract $1,500.

Your net cash flow from financing activities: $3,000 - $1,500 = $1,500

6. Add together net cash flows

Add up the net cash flows from your operating, investing, and financing activities above. This tells you the overall change in cash and cash equivalents for the period.

Total cash flow: $4,800 (operating) - $2,000 (investing) + $1,500 (financing) = $4,300

7. Reconcile with beginning cash balance

To determine your ending cash balance, add the change in cash to the beginning cash balance. Make sure this figure matches the cash balance reported on your balance sheet.

• Beginning cash balance: $5,000
• Change in cash: + $4,300
• Ending cash balance: $9,300

This means your bakery ended the month with $9,300 in cash.

Forecasting with a cash flow statement

Utilizing cash flow statements for forecasting enables you to anticipate future financial positions, plan for expenses, and make informed decisions about investments or expansions. Regular cash flow analysis helps identify trends, manage liquidity, and ensure your business can meet its financial obligations.

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: 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 the major sections of the cash flow statement point back to cash balances, this financial report serves as a business’s early warning system.

Free cash flow statement template

To assist you in managing your finances, QuickBooks offers a free cash flow statement template tailored for small businesses. Simply enter the applicable values in their respective cells to track and analyze your cash flows and maintain better control over your company’s financial health.

A well-prepared cash flow statement is indispensable for effective financial management. By understanding and utilizing this tool, you can ensure your business remains solvent, ready to meet obligations, and poised for growth. QuickBooks provides a range of cash flow tools to help you streamline your finances and take control of your future. Get started today.