How to create a cash flow statement
Let’s do a step by step guide of how to create a cash flow statement.
Your first port of call is to gather up all your financial information, bank statements, receipts, and invoices. Make sure you have the right and accurate records for the period you want to assess.
A cash flow statement is broken down into three main sections:
This section is all about the cash transactions that are related to your business’s core operations. This includes cash received from customers, payments to suppliers, and other operational costs. This section is a reflection of the day to day activities that run your business.
List all your cash inflow and outflow from your business activities:
Payment to suppliers of goods and services
Receipts and invoices from sales of goods and services
Any other income sources
This is where you will record transactions associated with your investments. So here you would include purchasing or selling assets like property, equipment or stocks. By understanding your investments you can evaluate the longer term growth and sustainability of your business finances.
Sale of assets
Loans received from customers
Proceeds from mergers and acquisitions
Purchase of assets
Loans made to vendors
Payments made relating to mergers and acquisitions
In this section of the cash flow statement, you will focus on how your business raises and repays capital. This includes loans, finance repayments, and share activities. By assessing your financing activities you can evaluate your business’s financial structure and leverage.
Capital raised from investors
How to calculate your cash flow
Now you have all your information it’s time to calculate your cash flow. There are two ways to do this for your cash flow statement.
Direct cash flow method
This is the easiest and most direct way to work out your net cash flow. Simply add all the cash inflows together to get your total cash received from business operations. Then add all your cash outflows together to get your total cash paid out for business operations. All you need to do then is subtract the total outflows from the total inflows to get your net cash flow.
Here is an example:
Income from sales: £5,000
Interest received: £200
Total cash inflow: £5,200
Supplier payments: £2,500
Employee salaries: £1,800
Total cash outflow: £5,000
£5,200 (inflow) – £5,000 (outflow) = £200 Net cash flow from operations.
Indirect cash flow method
This method starts with your net income for the specific period you are tracking. However, it also includes non cash items such as depreciation. These adjustments are then made to give you a more accurate idea of the actual cash generated by your business operations.
Here is an example:
Net income: £5,000
Total non cash adjustments: £1000
Accounts receivable increased by: £500
Accounts payable decreased by: £300
Other changes: £100
Total changes in working capital: £300 (£500 -£300 + £100)
£5,000 (net income) + £1,000 (total non cash adjustments) + £300 (total changes in working capital) = £6,300.
Both methods help to provide a useful cash flow statement but many companies choose to use the direct method as it is a simpler approach.
Creating a cash flow statement is a vital aspect of understanding your financial position and financial management. By creating a cash flow statement and regularly reviewing it you can gain valuable and actionable insights. You can make informed decisions, better plan for the future and help to ensure the long term financial stability of your business. So take control of your financial health today and get creating a cash flow statement!