A cash flow statement shows how much money went into your business and came out of your business in a period in the past.
While a cash flow budget attempts to predict how your business will do in the future, a cash flow statement shows how it did in the past. It’s one of the three main financial statements, alongside the balance sheet and the income statement.
Why is a cash flow statement important?
The cash flow statement shows the financial health of the business, and how well it’s being managed.
Creditors and investors can look at the statement to see where money comes from and how money is being spent. This helps determine the liquidity of the business, in other words whether it has enough cash available. This is important for creditors who want to extend you credit, and investors who are considering investing in your business.
Note that a negative cash flow might not always be a bad sign. If you’ve expanded your business, you might have negative cash flow for a short period, but then cash flow will likely improve in the future.
How do I set up a cash flow statement?
First you should gather the income statement, which shows revenue and expenses, and the balance sheet, which shows assets and liabilities.
Decide which period you’re going to cover, such as a month, quarter or a year.
Then you can use this formula:
Cash from operating activities ± cash from investment activities ± cash from financing activities
Cash from operating activities
Transaction related to the core business operations, such as revenue from sales, cash paid to suppliers, wage costs, and income tax payments.
Cash from investment activities
Transactions related to the purchase and sale of long-term assets like property and equipment, or loans made to suppliers or received from clients.
Cash from financing activities
Transactions related to loans and repayments, company stock and dividends.
