Cash Flow Statement: What It Is and How to Make One

You might be able to start a business with nothing but a good idea and the determination to see it through. Keeping a business running, however, requires a little more in the way of planning and coordination. 

Maintaining the health of a business and creating sustainable growth requires careful cash flow management. You have to spend money to make money, and that means making sure you have funds available when you need them.

That’s where the cash flow statement comes in. A cash flow statement is an essential tool for managing your business and keeping the money moving.  

What is a Cash Flow Statement?

A cash flow statement is a document collecting all of the business data from day-to-day operations to report on the company’s liquidity and financial health at any given moment.

Cash flow statements are not so much concerned with long-term profitability or projections but with actual cash inflows and outflows. Rather, it’s a cash flow report on money that has been received and money that has been spent.

Why Do Small Businesses Need Cash Flow Statements?

Business owners need cash flow statements to keep them informed about the health of their business. Accurate and timely data on your cash activity can help you stop crises before they start. Cash flow statements can also help businesses project their future cash flow and make better decisions for growth.

If you’re not fully informed, you might find yourself stuck without any working capital when you need it most. Financing cash flow statements are crucial for any long-term small business risk management strategy.

You’ll also need to produce a cash flow report to demonstrate your company’s health to potential investors. This gives your supporters a snapshot of your business operation and its sustainability.

How Cash Flow Statements Work

Reports of cash inflow and outflow for your company present an image of your company’s health. The cash flow statement tells you your net earnings, expenses, and where the funds flow from and to.

Investors and accountants will gauge a business’s health by looking first to see whether your net cash flow is negative or positive. They are looking to see how sustainable and successful your company is and how likely you will reliably pay your debts.

Negative Cash Flow

Negative cash flow means that you are spending more money than your net earnings. You might still have plenty of working capital on hand, but if your outgoing cash transactions are far larger than your incoming cash transactions, that’s not a sustainable position. 

A business investing in its growth may have to manage a negative cash flow for a short time, but this is not a position you want to be in long-term. 

Positive Cash Flow

Having a positive cash flow means more cash inflow than cash outflow. This is an indicator of financial health. 

More surplus business cash on hand because of a positive cash flow also means you have resources available to work on expanding your operations. 

Structure of a Cash Flow Statement:

You should split your actual cash flow statement into several categories. This way, managers and investors can quickly get a sense of where you are making money and spending it. 

Operating

Most of your regular business activity will show up under your operating cash flow. This category includes all cash paid and earned for your ordinary day-to-day operations as a business.

Inflows here will include receipts for all current assets you sell. Many of your outflows will be supply and labor expenses. Anything you spend on raw materials, wages, income taxes, or even rent payments will count as an operating expense.

Investing

The next category is your cash flow from investing activity. This section includes cash paid for more significant assets, loans to vendors, and any other money spent on equipment or investment changes. 

Most transactions in this category tend to be expenses, although you may see inflows here from equipment or investments you choose to sell.

Financing

Then there are your cash flows from financing activities. This category includes all the cash flowing into your company from investors funding your operation. Outflows here will consist of paying out dividends, principal debt repayment, and most other debt or equity-related expenses. 

Your cash flows from financing activities should demonstrate how money flows between you and your creditors, investors, and stockholders. 

Non-cash activities

To give a complete picture of your company’s financial health, you may also need to include a separate category for non-cash activities. This should include scheduled inflows and outflows that haven’t yet been processed.

Much of this category will consist of your net income parts that don’t show up in other categories. If you’ve sold several products or bought new inventory but haven’t yet received or paid for those cash transactions, you can include them here as accounts receivable and accounts payable.

These are not technically part of your cash activity yet, but they are still relevant data to include under non-cash activities.

How to Calculate Cash Flow

Cash flow is not the same as net income. Keeping accurate records of your debits and credits is essential, but that doesn’t tell you how much liquid capital you have available at any given time.

There are two primary ways of calculating your cash flow.  

Direct Cash Flow 

The direct cash flow method simply adds up all the cash inflows and outflows from each category to total your net cash flow. 

You can get a basic idea of your net cash flow this way by checking for the net change in each of your account balances from the beginning to the end of a set period.

Indirect Cash Flow

However, the direct method is challenging for some businesses, especially for those using the accrual method of financial accounting instead of the cash-based method. If you record transactions at the point of purchase before the cash has been exchanged, those records don’t reflect your actual cash flow.

In such cases, you can use more indirect methods to measure your cash flow. You would simply take your net income for a period from your income statement and then adjust it to reflect your cash flow.

Finding your net cash flow from your net income requires removing accounts payable and receivable that have not yet been paid in cash and adding back in operating activities that don’t usually make it into your income statement.

Accounts Receivable

To understand the difference between net income and cash flow, you need to know how accounts receivable work. 

Accounts receivable are payments due to your business that have yet to be received. This is money that you have already earned but that hasn’t yet become cash. As soon as you sell a product or service and issue an invoice, you have essentially opened an account receivable. However, that account won’t produce any cash until the invoice is paid.  

Accounts receivable are not included as a part of your cash flow. 

Inventory Value

Another critical part of your income that doesn’t factor into cash flow is your inventory value. Spending money on inventory is an essential and necessary investment, and that inventory has value, even before you sell it. 

However, inventory only factors into your cash flow as an expense until it has been sold. Cash flow measures only the money you have immediately at hand and ready to spend.  

Where Do Cash Flow Statements Come From?

Some business owners put together their own cash flow statements, but that’s not the only way to manage them. If a business wants to learn how to streamline accounting processes to save time and increase bookkeeping accuracy and efficiency, accounting software or a hired accountant can produce regular reports. 

Work with a Professional

The cash flow statement, along with the balance sheet and the income statement, is one of the essential financial documents every company needs to put together. If you’re not sure of how to put it together yourself, find a small business tax accountant to work with. 

An accountant can help you produce reports and improve your planning and efficiency overall. Accounting professionals can offer your business a lot more than just assistance with your income taxes.