Cash Flow Statements – how to prepare them and why

Capturing an accurate snapshot of your business’s cash flow isn’t easy. The constant ebb and flow of money in, money out makes it really hard. Is it actually worth all the bother?

Why are cash flow statements so important?

You do need a handle on your cash flow so you can spot trends in cash management and keep your company in good financial health. This is more important than you’d think.

Your business may have sales revenues and appear profitable. However, slow collections of invoiced sales can cause a bottleneck, impeding your ability to meet your financial obligations. The last thing you want is delayed payments to employees, vendors and other creditors – these can be hugely detrimental to your business. So, to get a picture of your cash flow over a specified period of time, create a cash flow statement.

A look back over time, typically a quarter, enables you to look forward to the next quarter, ensuring in advance that you have the funds on hand to pay your bills. You can see it as a health check.

Creating a financial snapshot

The cash flow statement shows changes in your cash on hand, which includes funds in your bank account and short-term investments that you can easily convert to cash. It reflects the activities of your business, in the following ways:

• Operating activities – the course of regular business. Inflow from operating activities includes revenue from selling products or services, interest, dividends that the business receives, and other cash receipts.

  Outflow from operating activities includes payroll costs (wages, benefits and employment taxes), payments to suppliers and vendors, overheads (rent, utilities, insurance, etc.), income tax and other business taxes, and other cash payments.

• Investing activities – gains or losses from investments. Inflow from investment activities includes sales of business assets other than inventory, payments received from loans that your business made, and other sales that are not in the normal course of business.

  Outflow includes purchases of capital equipment and loans that you make.

• Financing activities – raising capital externally. Inflow reflects money that’s borrowed and the proceeds from the sale of your company’s securities.

  Outflow shows servicing debt service and dividend payments.

If that sounds rather complicated, don’t worry. Once you know how, it’s quite simple.

Getting started

There are two ways of creating a cash flow statement. The one you choose depends on the information you need from your cash flow statement.

• Direct method. This tracks money coming in and going out as part of your operating activities. Essentially, this method merely subtracts money spent from money received.

• Indirect method: This method is more complicated. It starts with net income and factors in depreciation.

Creating your cash flow statement

To create a cash flow statement manually, review your income and expenses in each of the above three categories. Use a spreadsheet or template to organize your data into a cash flow statement (you can download a free cash flow statement template here).

Essentially, your entries show cash in and cash paid out each month for the period of your cash flow statement.

But, you’ll be glad to hear there’s a much easier way of doing this. If you use an online accounting system like QuickBooks, you can create a cash flow statement with minimal effort. QuickBooks records your income and expenses as you go, so it has all the information needed to generate a cash flow statement automatically. That’ll save you a huge amount of time.

Reviewing and Projecting Cash Flow

Now that you’ve got the cash flow statement in place, looking back over the quarter allows you to see where your money went and what trends there are in your business activities.

Now, use this to look ahead, to make sure you have the funds available to meet your obligations. What are your upcoming expenses? What do you project your future revenue to be? Again, look ahead for a specific period, such as the next quarter, and use the information in the cash flow statement to generate your projections.

The projections help you decide which actions to take, such as cutting expenses if more money is going out compared with revenue coming in, or seeking a short-term infusion of capital if cash on hand isn’t enough to pay upcoming bills. Once again, it’s up to you to monitor your projections and review your business activities so you can make adjustments accordingly.

And finally…

Cash is essential for keeping your company afloat. Make sure you have a good understanding of where your money comes from and when, as well as where it’s spent. This is vital in order to meet your financial obligations.

Download a free cash flow statement template to get started. Or, even better, see how QuickBooks generates cash flow statements automatically from your accounts. Try it free for 30 days, and see how it makes your life so much easier.

We hope you’ve found this article helpful in explaining the impact of good cash flow management on your business. QuickBooks strive to help new small businesses succeed, by providing solutions to help you get paid on time.

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