How to Prepare a Cash Flow Statement

Cash flow statements help you spot trends in cash management and keep your company in good financial health.

With payments coming in from customers, salaries to distribute, stock to order and rent to pay, keeping track of the constant ebb and flow of money in your business isn’t easy. But getting a handle on your cash flow is absolutely necessary to run a successful business.

If you’re looking to get a better financial snapshot of your business and plan ahead, a cash flow statement helps you do just that.

Also Read: Try QuickBooks Online Accounting Software

What is a cash flow statement?

A cash flow statement summarises the amount of cash into, and cash paid out by your company over a specific time period. These are also known as 'inflow' and 'outflow'.

Cash flow statements generally cover the ebb and flow of money across three main areas: everyday business operations, investment activities, and financing.

Business operation activities

• Inflow: This could be income in the form of revenue from selling products or services, interest, dividends that the business receives, and other cash receipts.
• Outflow: These cover things like payroll costs, payments to your suppliers or vendors, overheads such as rent and utilities, taxes, and other cash payments.

Investment activities

• Inflow: These could be the sale of business assets (aside from your stock), payments received from loans that your business made, or other sales that aren’t part of your everyday business operations.
• Outflow: Purchases of capital equipment or loans that you make to other companies and individuals.

Financing activities

• Inflow: This covers money that’s borrowed, such as raising capital externally and the proceeds from the sale of your company’s securities.
• Outflow: This involves servicing debts and dividend payments to investors.

To sum it up: your cash flow statement provides a financial snapshot of all the money coming into your business, and all the money leaving your business. Cash flow statements can be prepared for any time range, but most businesses either do it on a monthly or quarterly basis.

Why is a cash flow statement important?

Your business might be regularly generating sales revenue and appear profitable. However, when it comes time to collect payment for invoices, it’s a different story. A study by the Small Business Institute (SBI) revealed that the average invoice takes 101 days to be paid in South Africa. In other words, most businesses won’t receive payment until more than three months after sending an invoice.

Having a delay in payments can cause a bottleneck, which affects your ability to meet other financial obligations, such as salaries to employees, payment for goods and services, or even repayments on business loans. Over time, these chip away at your business. You might need to take out a loan to cover your payments or delay payments until you have enough funds.

A cash flow statement enables you to get a picture of your income and expenses over a specific period of time. This information comes in handy to better plan your funds going forward, so you can ensure in advance that you have the money on hand to pay the bills.

A step-by-step guide to preparing a cash flow statement

Preparing a cash flow statement might sound complicated, but don’t stress, in reality, it’s actually quite simple. 

There are a couple of types of cash flow statement format, depending on the information you need to get out of it:

• Direct method: This tracks cash payments coming in and going out as part of your operating activities. It’s fairly straightforward to do: simply subtract the money spent from the money received over a period of time, and look at the net decrease or increase.
• Indirect method: This method is a bit more complex. It starts with net income and factors in depreciation. The indirect method takes into account the cash earned, even if the cash hasn’t been received.

The direct method is generally used when presenting cash flow to shareholders or others, because it’s straightforward and easy to understand at a glance. However, most accountants opt for the indirect method because it’s simpler to prepare using the information provided on a company’s income statement and balance sheet.

1. Track your income and expenses

To get started with preparing your cash flow statement, you need to first track your income and business expenses in each of the categories listed above (business activities, investing activities and financing activities). 

You can do this using a cash flow statement template or a cash flow statement example spreadsheet, where you manually enter in all your sales and expenses from receipts, payslips and more. 

Another (much easier) way of doing this is through an online accounting system like QuickBooks. QuickBooks records your income and expenses as you go, so you have all the information you need to automatically generate a cash flow statement. This saves you a huge amount of time, and you can get a financial snapshot of your cash flow in real-time, no matter where you are.

Keep your cash flow in good shape with QuickBooks accounting software. This will help your business maintain a positive cash flow, and stay on top of your income and expenses.

2. Conduct a cash flow analysis

Now that you’ve got the cash flow statement in place, it’s time to step back and look at the numbers. Review your inflow and outflow over the past month, to see exactly where your money went and spot any trends there are in your business activities.

If you’re not sure how to go about it, here are some questions to help you get started:

• What is my cost of goods sold (COGS)? This will help you get an idea of how much you’re spending to create your product or service. Understanding this puts you in a good position to make adjustments as needed.
• Am I making a profit, or just breaking even? If you’re spending as much as you’re putting in, this doesn’t leave you with any extra funds to grow your business, or provide you with a safety net in case of emergencies.
• What’s my net operating margin? As we touched on earlier, this is the difference between income and expenses. This number should be positive, the larger it is, the more wiggle room you have in case an unexpected payment arises or a customer is late in paying you.
• What are the patterns for payment and expenses? You might have some clients who perpetually pay you late, or cash might be tighter in some months versus others. If you can pinpoint patterns, it’s easier to adjust your spending or plans to stay on top of your cash flow.

3. Make projections for the future

With an accurate cash flow statement, you can start looking ahead to make sure you have the funds available to meet your obligations. 

Review your business activity for the coming months. What are your upcoming expenses? What do you project your future revenue to be? Use the information in the cash flow statement to generate your projections for the future.

After you’ve done this, it’s time to take action.

4. Adjust your business activity or spending

Equipped with your cash flow statement and your projections, you’ll have enough information to take action and ensure your business is financially sound going forward. 

If you expect to have more money going out than revenue coming in, it might be worth cutting expenses for the foreseeable future. If clients are paying late, you could consider an incentive for those who pay on time, or adjust your payment due date. And if you’re really expecting to be tight on cash for the coming months, it could be a good idea to look for a short-term infusion of capital to help you get through.

Ultimately, it’s up to you to monitor your projections and review your business activities so you can make adjustments accordingly.

Stay on top of your cash flow with QuickBooks Online.

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. Equipped with this information, you’ll be able to make better financial decisions to grow your business in the long run.

If you want to stay on top of your cash flow without the spreadsheets, QuickBooks helps you save time and simplify the cash flow statement process. QuickBooks generates cash flow statements automatically from your accounts, so you can quickly get a snapshot of your finances at any time. 

Try QuickBooks free for 30 days here.