Cash flow statements: preparation, examples & template

Staying cash flow positive is critical to your business' success.

But, according to a recent SME Growth Index report released by ScotPac, a massive 72.5% of small business owners reported having cash flow problems. Further, The Invoice Market’s SME Cash Flow Report cites that Australian small businesses are owed an average of $38,000 at any given point in time.

Having this amount of cash tied up can impede a business’ ability to fund operations, invest in growth, and in some cases survive.

So, how do you improve cash flow?

The first step is to understand how much cash is coming in and going out, as well as the amount you have on-hand at any given point in time.

Let’s look at how to prepare a cash flow statement in order to stay on top of your cash flow — and keep it moving in the right direction.

What is a cash flow statement?

A cash flow statement is a document, typically generated monthly, quarterly, and/or annually, showing how much cash a business has on hand at a given moment in time.

Moreover, a cash flow statement shows specifically where your spent cash has gone, and where your incoming cash is coming from.

Note that we’re talking about actual cash exchanges and cash on-hand, here. Your cash flow statement is only concerned with financial transactions in which actual money changes hands.

With this information in hand, you’ll gain a better idea of your business’ current financial situation — and will also be better able to predict your financial future, as well.

What’s included in a cash flow statement?

A cash flow statement includes 3 types of cash-related transactions:

• operating activities

• investing activities

• financing activities.

Let’s take a closer look at each of these.

Cash flow from operating activities

Operating cash flow (OCF) refers to cash generated or spent through a company’s typical business operations.

Looking at incoming cash flow, operating activities include cash coming from sales, interest payments, and dividends. Outgoing operating activities include cost of goods sold (COGS), as well as payments made to employees and suppliers, and on any taxes due.

Your operating cash flow is perhaps the most vital piece of the puzzle, as it shows whether your business is able to bring in more money than it pays out through normal operations. If your operating cash flow isn’t steadily improving over time, it may be a sign that your business is unsustainable.

In any case, understanding your operating cash flow will allow you to make laser-focused improvements to your internal processes, your approach to pricing, and much more. In turn, you’ll be generating more cash in due time — and will be spending a lot less to make it happen.

Cash flow from investing activities

Cash flow generated or spent on non-current assets is considered investing cash flow (CFI).

Incoming cash flow from investing includes payments made to your company from loans, cash received from the sale of assets, and funds received from market security maturation. Examples of outgoing CFI include payments made on property, equipment, and other business acquisitions.

It’s not uncommon for small, growing businesses to have a negative CFI. As the old saying goes, you’ve got to spend money to make money — and it may take some time for your investments to start paying off.

That said, once a business achieves profitability, it should become a bit easier to maintain a positive CFI while also increasing their spend on growth.

Cash flow from financing activities

Cash flow from financing (CFF) shows cash raised or spent for the purpose of funding the company.

As such, it involves cash-based transactions revolving around debt, dividends, and equity. CFF considers cash incoming from loans and stock issues, along with outgoing payments on dividends and outstanding loans.

Typically, CFF is used to assess the financial strength and structure of the company — in turn providing investors with insight into the business’ stability and growth.

Because of this, context is crucial when analysing cash flow from financing activities.

A positive cash flow gained, for example, by repurchasing stocks during a downturn isn’t necessarily a good thing — and may make investors quite skeptical. On the other hand, a negative CFF can be a sign of overwhelming debt — or it may simply be due to the company paying off debts early and in full.

Cash flow vs. Profit and Loss statement

While there is some overlap between a cash flow statement and a Profit and Loss (P&L) report, they're 2 completely separate documents — and should be treated as such.

Conflating your cash flow and your P&L numbers can potentially give you the wrong impression of your company’s financial situation.

The main difference between the two:

A cash flow statement shows how much cash the company has on hand at the end of the period, while a profit & loss statement shows how much revenue was generated in that same time period — even if the actual cash is yet to be collected.

(For example, while sales made with net terms attached are shown in full on a P&L statement, only the cash that’s been collected thus far would be shown on a cash flow statement for the same time period.)

Both documents differ in how they’re used, as well. While a P&L statement is helpful for assessing a business’ performance over the long-term, cash flow statements assess the company’s ability to support and sustain this performance over time.

Because of this, both documents should be used in conjunction with one another to get a true grasp on your company’s financial status on a macro and micro scale.

Why do you need cash flow statements?

We already discussed the “big picture” reason why you need cash flow statements:

Without an accurate and comprehensive handle on your cash flow situation, your business is essentially always at risk.

Staying on top of your cash flow, on the other hand, is helpful in a number of ways.

Understand your level of liquidity

For starters, a cash flow statement tells you how much liquidity you have available at a given moment.

Keeping track of your cash on-hand is crucial for maintaining operations and keeping your business moving in the right direction. Without an understanding of how much you have in your coffers, running out of cash will always be a distinct possibility.

Understand your asset, liability and equity positions

Used in conjunction with a balance sheet, a cash flow statement can help owners understand their overall equity status.

Analysed over time, your cash flow statements and other financial records will show how your assets, liabilities, and equity have fluctuated over time. This gives you a clearer understanding of your business’ performance during that time period — and enables you to identify when things aren’t going as well as they’d seemed.

Predict future cash flow

The better you understand where your cash comes from and goes to, the more able you’ll be to predict how this will all go down in the future.

This, again, is why assessing cash flow in context is so important:

By assessing the necessary variables in relation to one another, you’ll understand how a change in one area will lead to changes elsewhere. From there, you can make more informed and strategic financial decisions as you continue striving toward growth.

Positive cash flow vs. negative cash flow

Unless you’ve broken exactly even over the time period in question, your cash flow statement will show either a positive or negative cash flow.

As we’ve touched on, your final cash flow numbers should never be taken at face value.

In many cases, a negative cash flow isn’t necessarily a cause for concern.

Fledgling owners, for example, will need to spend a ton of capital to get their business up and running — and likely won’t hit their break-even point for some time. Paying off purchases in full will also decrease your cash flow — but the newly-acquired assets can make this decrease worthwhile.

That said, an unplanned or unexpected cash flow is almost always a sign that something is wrong. But, if you’re meeting your projections regarding cash flow and overall business performance, sporadic negative cash flow is no reason to panic.

A positive cash flow doesn’t necessarily mean business is all of a sudden booming, either. For example, the increase may be due to credited purchases that have already been accounted for, but are only now being realised. Taking out a loan can also cause your cash flow to spike.

With that in mind, you’ll always want to look past the actual dollar amount shown — and to focus more on how this number came to be.

How to prepare a cash flow statement

Now that we have a better idea of what a cash flow statement is, what it involves, and why it’s important, let’s walk through the process of actually creating one.

1. Gather your financial documents and data

In order to nail down your cash flow for a given time period, you’ll need to consult your other financial records.

This includes:

• balance sheets, documenting the amount of debt you owe, along with the value of your assets and your overall business

• Profit & Loss statements showing your revenues and expenses throughout the time period

• past cash flow statements for the purpose of contextual analysis statement of changes in equity to connect the information presented in the above documents

• material transaction records and artefacts as evidence of the cash transactions that took place over the time period.

This preliminary step is necessary to ensure you don't overlook any important information that could impact your understanding of your cash flow.

2. Identify your opening cash balance

Once you’ve collected all of the above information, you simply need to identify how much cash you had on-hand at the start of the period.

3. List incoming cash

Make a list of all incoming cash transactions, including the amount collected, and the source of the funds.

4. Calculate your total incoming cash amount

Add up the total of all incoming cash transactions.

5. List outgoing cash

Then, list every outgoing cash payment you made over the time period.

Again, include both the amount and the recipient of the payment.

6. Calculate your total outgoing cash amount

Add up the amount of cash you paid out throughout the period.

7. Adjust for non-cash items

While your balance sheet will include non-cash transactions (such as depreciation and amortization), it’s important to factor these events out of your cash flow statement.

(Otherwise, it may look like you have more cash available than you actually do — which can cause major problems for your business.)

8. Calculate your cash flow

Subtract your total outgoing cash amount from the total amount of incoming cash to find your cash flow amount for the time period.

Cash flow = (Cash received) - (Cash paid out)

This will tell you how much actual cash you gained or lost over the timespan.

9. Calculate your closing cash balance

Finally, calculate your closing cash balance using the following formula:

(Starting cash balance) + (Cash flow for time period)

If your preparations and calculations were correct, the number you come up with should be the total amount of cash you have on-hand.

Improve your cash flow management with MYOB

Managing your cash flow is one of the most important things you can do to keep your business headed in the right direction.

Thankfully, MYOB’s accounting software includes tools and features specifically meant to help improve your cash flow management processes. From on-the-go documentation to automated reporting, our software ensures you’ll be able to stay on top of your cash flow at all times.

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