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How to Write a Cash Flow Statement

Understanding a cash flow statement is essential when writing a business plan for a startup and gaining potential investors for your new company. You can think of a cash flow statement as describing how much cash your company has coming in from profits and other sources and going out due to expenses and running costs.

Learning how to write a cash flow statement effectively will show investors your potential profits and help them make a decision on whether to invest or not. A cash flow statement is also very important to help in understanding how much money you will need to get your business up and running, and to foresee future risks that may put you in a pinch for cash. A typical cash flow statement shows how money will flow in and out of the business for at least one year.

Understanding the Components of a Cash Flow Statement

Daily Operations

The operating activities for your business will first include the monies that you will gain as profits. What goods or services will you be offering customers? Next, you will include the cash that is needed to provide those goods and services. How much money will be needed to pay employees, stock your shelves, pay for interest and taxes, and other details? These statements will help you understand your business’s profit margins before you dive head first into operations.

Investments

Your investment activities will include any property that is needed to run your business, equipment that will be bought or rented, and other assets that are generally thought of as one-time investments and not daily operational costs. You may also want to include potential needs for equipment maintenance and repair over the course of one year. Cash that is tied up in mergers or invested into the stock market will also need to be indicated when learning how to write a cash flow statement.

Financing

The financing section of a cash flow statement will include how loans have been used to procure property or equipment, issue stock to employees or stakeholders, pay out dividends, and other such issues. Some companies also include non-cash transactions like giving shares in return for assets.

How to Write a Cash Flow Statement Using the Indirect Method

Cash flow statements are a part of understanding a business plan and always accompany the income statements and balance sheets for businesses. To start building these pieces, businesses can either use the indirect or direct method. Most choose the indirect method because it is easier and leads to the same results. For businesses that have been in operation, the indirect method allows them to generate cash flow data from past statements in their accounting software that will give them an idea of how much cash flow they can expect in the future.

The Cash Flow Formula

The simplest way of understanding an indirect cash flow statement is by using a formula.

To calculate your cash flow, subtract the cash you paid out from the cash you brought in from sales.

For example, if last month you paid out $15,000 in bills and other expenses and received $20,000 from your customers, your total cash flow for the month would be $5,000.

When learning how to write a cash flow statement or forecast, there is a little more involvement needed. First, the net income number from the profits is found. Then, gains and losses on sales are reported. Changes in accounts receivable, accounts payable, and inventory will also need to be noted. After you figure out the net cash that is provided by the daily operations, monies from investments and financing will also need to be provided.

Forecast vs. Statement

A cash flow forecast helps you predict when you might need extra cash in the future, like for downtimes and non-busy seasons. A cash flow statement merely gives you the numbers for what has happened in the past. The statement is an important tool in developing your forecast for the upcoming year of cash flow.

How to Write a Cash Flow Statement Using the Direct Method

Using the direct method for learning how to write a cash flow statement is a bit more difficult, but it gives a more detailed picture of how cash is utilized in the business. Instead of using net income, gross inflows and outflows of cash through daily operations are used. That means monies paid to employees and manufacturers, investment payments, tax payments, and other received revenues need to be considered and reported. This makes it easy to see exactly where cash was received and paid out.

Don’t Be Afraid to Seek Help

Learning how to write a correct cash flow statement on top of all the other components of a business plan, and understanding the ins-and-outs of business ownership can get daunting very quickly. Simple mistakes in your calculations can even cost you the help of potential investors for capital that will make or break your business. Luckily, there are professional organizations, like BizCentral USA, that have years of experience in helping small business owners get started on the right foot. We can help you conquer the little things that might hold you back from making that dream of business ownership a reality. As you get up and running, we can also help grow and maintain your business with payroll, bookkeeping, and accounting services.

Starting a business is no easy task and comes with many hurdles along the way. It’s no secret that the majority of new small businesses fail within the first couple years of operation. While you may have the drive and skills for providing niche services or products, you may not be so savvy with the backend of what it takes to run a business. Good business owners recognize that they can’t do it all by themselves and surround themselves with a team of people who can be strong in areas where they are lacking. Let BizCentral USA give you a helping hand to learn how to write a cash flow statement and when working towards a successful future for your business.

Call us today for a consultation!

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