Maintaining a healthy cash flow is vital to the survival and growth of any business. A well-prepared cash flow statement helps business owners, investors, and lenders understand the actual liquidity position of a company. This financial statement provides a clear view of how cash moves in and out of a business over a specific period. To ensure the statement is accurate and reliable, follow these six structured steps for preparation.
1. Gather Your Financial Statements
Before you begin crafting a cash flow statement, you need to collect all the relevant financial documents. Start with the income statement and the balance sheet for the period you wish to analyze. These documents provide the raw data that you will use to calculate net cash from different activities.
Why it matters: Without accurate and up-to-date financial statements, your cash flow statement may be misleading or incorrect.
2. Determine the Starting Balance
Establish your opening cash balance — the amount of cash your business had at the beginning of the period. This includes cash in hand and balances in checking or savings accounts. This figure sets the foundation for your statement and helps track cash movement throughout the reporting period.
3. Calculate Cash Flow from Operating Activities
Operating activities reflect the core functions of your business. This section starts with the net income for the period and then adjusts for non-cash items and changes in working capital.
- Add back non-cash expenses, such as depreciation and amortization.
- Adjust for changes in working capital: Include variations in accounts receivable, inventory, and accounts payable.
Example: If your company earned $50,000 in net income but had a $10,000 increase in accounts receivable, this reduces the available cash, and your cash flow from operating activities would be adjusted accordingly.
This section reveals whether your day-to-day business operations are generating enough cash to sustain your operations.
4. Compute Cash Flow from Investing Activities
Next, analyze investing activities. This section tracks the company’s purchases and sales of long-term assets. Examples of investing activity cash flows include:
- Cash used to purchase equipment or property
- Proceeds from the sale of assets
If your business recently made a significant investment in a new location or sold a vehicle used in operations, these would appear here.
5. Evaluate Cash Flow from Financing Activities
Financing activities reflect how your business funds its operations through debt and equity. This includes cash flows related to:
- Issuing or repurchasing shares
- Borrowing from or repaying loans
- Paying dividends to shareholders
Positive cash flow in this section may indicate your business has attracted new investment or obtained financing to expand. Conversely, negative cash flow here could mean the company is repaying debts or distributing profits to shareholders.
6. Reconcile and Present the Final Cash Position
With all three sections completed, the final step is to add the net cash flows from operating, investing, and financing activities to your beginning cash balance. The result will be your ending cash balance for the period, which should match the amount shown in your company’s balance sheet.
Formula:
Beginning Cash + Net Cash from Operating Activities + Net Cash from Investing Activities + Net Cash from Financing Activities = Ending Cash
Ensure the statement is clearly formatted and includes each section distinctly. Transparency and accuracy are critical for stakeholders who rely on this document for decision-making.
Conclusion
Preparing a cash flow statement requires attention to detail and a clear understanding of your business’s financial activities. By following these six steps, you can create a reliable and revealing document that helps monitor financial health, plan for future expenses, and attract investments or financing. Whether you’re managing a small enterprise or a large corporation, keeping track of your cash flow should remain a top financial priority.
Comments are closed, but trackbacks and pingbacks are open.