What is a cash flow statement?

Annabel Ah-Lim

Group Finance & Operations Director

February 9, 2024

If you want to achieve your financial goals, then managing your finances is crucial. One excellent tool to help you do this and give you insight into your financial health is a cash flow statement.

We are going to explain what a cash flow statement is and provide step by step instructions on how to create one.

What is a cash flow statement?

A cash flow statement is a financial document that allows you to record and track all the cash that comes in and out of your business otherwise known as ‘inflow’ and ‘outflow’, over a specific period.

By doing this you get to see an overview of how money moves in and out of your business helping you to understand where your money is coming from and where it is going.

Why is a cash flow statement important?

Having a comprehensive view of your financial health in the form of a cash flow statement is important for various reasons.

Insightful financial planning

Understanding your cash flow means you can make informed financial decisions. These insights can help you decide on investments, growth plans, and better day to day expense planning. You will be in the know about your future revenue and expenditure.

Assessing financial health

A cash flow statement is a great way to assess the financial health of your business. Having a positive cash flow signals that your income exceeds your expenses and you have financial stability. A negative cash flow signals that you have financial challenges which need addressing.

Strategic decision making

A cash flow statement gives you a clear understanding of your cash flow. This information can help you to make informed decisions about budgeting, saving and investing. It gives the knowledge to allocate resources and make strategic decisions.

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:

 

Operating activities

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:

Outflows

Rent payments

Employee wages

Tax payments

Insurance payments

Interest payments

Payment to suppliers of goods and services

Inflows

Receipts and invoices from sales of goods and services

Any other income sources

 

Investing activities

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.

Inflows

Sale of assets

Loans received from customers

Proceeds from mergers and acquisitions

Outflows

Purchase of assets

Loans made to vendors

Payments made relating to mergers and acquisitions

 

Financing activities

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.

Inflows

Capital raised from investors

Outflows

Dividends

Stock repurchases

Debt repayments

 

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:

Cash inflows

Income from sales: £5,000

Interest received: £200

Total cash inflow: £5,200

Cash outflows

Supplier payments: £2,500

Employee salaries: £1,800

Rent: £700

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

Depreciation: £1,000

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!

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