It’s the end of the month, and your small business is booming. Wouldn’t it be great to have a financial statement that shows you what you did well, how you could improve, and potential ways to manage money more effectively?
A statement of cash flows can break down your inflows and outflows every month or year to help you better understand your business's spending habits. Continue reading to learn how to calculate cash flow in five simple steps, and download a handy cash flow template.
There are three core parts to a cash flow statement. To create a cash flow statement, review each cash transaction on record, and assign the dollar amount to one of three categories.
Statement of cash flows operating activities refers to day-to-day business management activities. The majority of your cash will be from operating cash flows. Buying materials, managing payroll, and collecting customer payments are all examples.
Investing activities in a cash flow statement refer to the inflow and outflow of investment capital for your small business. If your business purchases or sells an asset for cash, you'll post the impact here.
Financing activities in a cash flow statement refer to transactions that create funding for your small business. When a company raises money from investors, borrows funds, or pays down a loan, those cash transactions are classified as financing activities.
Calculating cash flow might be easier than you think. You can begin preparing a statement of cash flow in five simple steps:
1. Find the starting balance: You’ll need your starting balance from your latest income statement if you are using the indirect method to calculate cash flow.
2. Calculate operating activities: Subtract all your operating expenses from any earnings gained through business operations.
3. Calculate investing activities: Report any earnings or losses from company assets here. This includes land, vehicles, and equipment.
4. Calculate financing activities: Share any funding or financing you receive here. This includes debt payments, equity, and fundraising.
5. Share the ending balance: Combine the totals from your operating activities, investing activities, and financing activities calculations to achieve your end balance for this reporting period.
A cash flow statement lists the cash inflows and outflows of cash for a period of time, and the ending cash balance is the same dollar amount reported on the balance sheet .
You can calculate operating cash flow using the direct or indirect method:
Here are the main differences between the two methods:
After you calculate your operating activities, investing activities, and financing activities, use this template to calculate your statement of cash flows for this reporting period.
If possible, keep a copy of your income statement and balance sheet nearby to plug in your available cash across all of your financial statements and are ready to prep for the next reporting period.
Here's an example of how a small-business owner uses the direct method to produce a cash flow statement:
Julie owns Centerfield Sporting Goods—a firm that manufactures sporting goods products and sells them to retailers. Here's Centerfield’s income statement and balance sheet as of 12/31/23:
The income statement reports $40,000 in net income for the year, and net income increases retained earnings in the equity section of the balance sheet. Here's her statement of cash flows:
With the ending cash balance, Julie will be able to make informed decisions about how to use her cash in the next reporting period.
Organizing your financial statements is even more important as your small business begins to scale into a midsize company.
Utilizing reliable accounting software ensures that your finances are easy to reach and update so that you can maintain your focus on what matters most.
If you haven’t already, consider using our free template to craft a new business plan that addresses your needs and goals as a growing business.
The direct method requires a reconciliation document to supplement the cash flow statement, while the indirect method requires a net income starting balance to begin.
Why is a statement of cash flows important for business accounting?A cash flow statement is one of the three major financial statements that showcases the health of a business.
What is the difference between a cash flow statement vs. income statement vs. balance sheet?A balance sheet is a snapshot of a company’s financial position as of a specific date. An income statement reports revenue, expenses, and net income for a specific period of time. The statement of cash flows helps a business owner understand the differences between net income and the activity in the cash account.
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