A cash flow statement tells you how much cash is entering and leaving your business in a given period. Along with balance sheets and income statements, it’s one of the three most important financial statements for managing your small business accounting and making sure you have enough cash to keep operating.
First, let’s take a closer look at what cash flow statements do for your business, and why they’re so important. Then, we’ll walk through an example cash flow statement, and show you how to create your own using a template.
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A cash flow statement is a regular financial statement telling you how much cash you have on hand for a specific period.
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While income statements are excellent for showing you how much money you’ve spent and earned, they don’t necessarily tell you how much cash you have on hand for a specific period of time.
If you use accrual basis accounting, income and expenses are recorded when they are earned or incurred—not when the money actually leaves or enters your bank accounts. (The cash accounting method only records money once you have it on hand. Learn more about the cash vs. accrual basis systems of accounting.)
So, even if you see income reported on your income statement, you may not have the cash from that income on hand. The cash flow statement makes adjustments to the information recorded on your income statement, so you see your net cash flow—the precise amount of cash you have on hand for that time period.
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For example, depreciation is recorded as a monthly expense. However, you’ve already paid cash for the asset you’re depreciating; you record it on a monthly basis in order to see how much it costs you to have the asset each month over the course of its useful life. But cash isn’t literally leaving your bank account every month.
The cash flow statement takes that monthly expense and reverses it—so you see how much cash you have on hand in reality, not how much you’ve spent in theory.
On top of that, if you plan on securing a loan or line of credit, you’ll need up-to-date cash flow statements to apply.
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When your cash flow statement shows a negative number at the bottom, that means you lost cash during the accounting period—you have negative cash flow. It’s important to remember that long-term, negative cash flow isn’t always a bad thing. For example, early stage businesses need to track their burn rate as they try to become profitable.
When you have a positive number at the bottom of your statement, you’ve got positive cash flow for the month. Keep in mind, positive cash flow isn’t always a good thing in the long term. While it gives you more liquidity now, there are negative reasons you may have that money—for instance, by taking on a large loan to bail out your failing business. Positive cash flow isn’t always positive overall.
If you do your own bookkeeping in Excel, you can calculate cash flow statements each month based on the information on your income statements and balance sheets. If you use accounting software, it can create cash flow statements based on the information you’ve already entered in the general ledger.
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Keep in mind, with both those methods, your cash flow statement is only accurate so long as the rest of your bookkeeping is accurate too. The most surefire way to know how much working capital you have is to hire a bookkeeper. They’ll make sure everything adds up, so your cash flow statement always gives you an accurate picture of your company’s financial health.
In order to figure out your company’s cash flow, you can take one of two routes: The direct method, and the indirect method. While generally accepted accounting principles (US GAAP) approve both, the indirect method is typically preferred by small businesses.
Using the direct method, you keep a record of cash as it enters and leaves your business, then use that information at the end of the month to prepare a statement of cash flow.
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The direct method takes more legwork and organization than the indirect method—you need to produce and track cash receipts for every cash transaction. For that reason, smaller businesses typically prefer the indirect method.
Also worth mentioning: Even if you record cash flows in real time with the direct method, you’ll also need to use the indirect method to reconcile your statement of cash flows with your income statement. So, you can usually expect the direct method to take longer than the indirect method.
With the indirect method, you look at the transactions recorded on your income statement, then reverse some of them in order to see your working capital. You’re selectively backtracking your income statement in order to eliminate transactions that don’t show the movement of cash.
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Since it’s simpler than the direct method, many small businesses prefer this approach. Also, when using the indirect method, you do not have to go back and reconcile your statements with the direct method.
You use information from your income statement and your balance sheet to create your cash flow statement. The income statement lets you know how money entered and left your business, while the balance sheet shows how those transactions affect different accounts—like accounts receivable, inventory, and accounts payable.
Now that we’ve got a sense of what a statement of cash flows does and, broadly, how it’s created, let’s check out an example.
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There’s a fair amount to unpack here. But here’s what you need to know to get a rough idea of what this cash flow statement is doing.
You’ll also notice that the statement of cash flows is broken down into three sections—Cash Flow from Operating Activities, Cash Flow from Investing Activities, and Cash Flow from Financing Activities. Let’s look at what each section of the cash flow statement does.
Using the cash flow statement example above, here’s a more detailed look at what each section does, and what it means for your business.
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For most small businesses, Operating Activities will include most of your cash flow. That’s because operating activities are what you do to get revenue. If you run a pizza shop, it’s the cash you spend on ingredients and labor, and the cash you earn from selling pies. If you’re a registered massage therapist, Operating Activities is where you see your earned cash from giving massages, and the cash you spend on rent and utilities.
Depreciation is recorded as a $20, 000 expense on the income statement. Here, it’s listed as income. Since no cash actually left our hands, we’re adding that $20, 000 back to cash on hand.
Increase in Accounts Payable is recorded as a $10, 000 expense on the income statement. That’s money we owe—in this case, let’s say it’s paying contractors to build a new goat pen. Since we owe the money, but haven’t actually paid it, we add that amount back to the cash on hand.
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Increase in Accounts Receivable is recorded as a $20, 000 growth in accounts receivable on the income statement. That’s money we’ve charged clients—but we haven’t actually been paid yet. Even though the money we’ve charged is an asset, it isn’t cold hard cash. So we deduct that $20, 000 from cash on hand.
Increase in Inventory is recorded as a $30, 000 growth in inventory on the balance sheet. That means we’ve paid $30, 000 cash to get $30, 000 worth of inventory. Inventory is an asset, but it isn’t cash—we can’t spend it. So we deduct the $30, 000 from cash on hand.
Meaning, even though our business earned $60, 000 in October (as reported on our income statement), we only actually received $40, 000 in cash from operating activities.
Cash Flow Statement Template For Excel
This section covers investments your company has made—by purchasing equipment, real estate, land, or easily liquidated financial products referred to as “cash equivalents.” When you spend cash on an investment, that cash gets converted to an asset of equal value.
If you buy a $10, 000 mower for your landscaping company, you lose $10, 000 cash and get a $10, 000 mower. If you buy a $140, 000 retail space, you lose $140, 000 cash and get a $140, 000 retail space.
Under Cash Flow from Investing Activities, we reverse those investments, removing the cash on hand. They have cash value, but they aren’t the same as cash—and the only asset we’re interested in, in this context, is currency.
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For small businesses, Cash Flow from Investing Activities usually won’t make up the majority of cash flow for your company. But it still needs to be reconciled, since it affects your working capital.
Is recorded as a new $5, 000 asset on our income statement. It’s an asset, not cash—so, with ($5, 000) on the cash flow statement, we deduct $5, 000 from cash on hand.
This section covers revenue earned or assets spent on Financing Activities. When you pay off part of your loan or line of credit, money leaves your bank accounts. When you tap your line of credit, get a loan, or bring on a new investor, you receive cash in your accounts.
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Is recorded as a $7, 500 liability on
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