What is a cash flow statement?
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Tracking cash in and out of your business is the foundation of basic financial management. Owners need to know what they earn, what they’re spending, and what cash they have available. A cash flow statement is your starting point for all of it.
Alongside your balance sheets and income statements, it’s one of the three core financial documents you’ll use most often when you’re running your business.
Here we’ll go into more detail about what a cash flow statement is, how to prepare one and how to use it in your business.
What is a cash flow statement?
A cash flow statement tracks cash in and out of your business to help you understand your financial health and operating efficiency.
The cash flow statement (CFS) shows how well your business handles its cash—how efficiently it generates cash to pay off debts and cover operating costs. As one of the three key financial statements, along with the balance sheet and income statement, the CFS is essential for a complete financial overview.
How to use your cash flow statement
A cash flow statement shows how your operations are running, where your money comes from, and how it’s being spent. This insight is crucial for several scenarios:
- Managing Debt: The CFS helps you see if you’re generating enough cash to meet debt obligations. If you’re planning to take on a loan, reviewing your CFS can help ensure you can handle additional debt.
- Operational Efficiency: By tracking cash from operating activities, you can assess whether your core business is generating sufficient cash flow. For instance, if you notice a consistent shortfall, it might be time to reevaluate your business model or reduce operating costs.
- Investment Decisions: If you're considering investing in new equipment or expanding your business, the CFS shows whether you have enough cash on hand or if you’ll need external financing.
- Attracting Investors: Investors use the CFS to determine if your business is on solid financial ground. A healthy cash flow can make your business more attractive to potential investors, demonstrating liquidity and operational efficiency.
What does a cash flow statement show?
When you’re looking at your cash flow statement, you should be able to draw various insights:
- Liquidity: It shows how much cash is available to fund operating expenses and pay down debts.
- Financial Stability: It reveals whether your business is generating enough cash to sustain operations.
- Operational Performance: It helps identify areas where cash flow might be improved, such as reducing expenses or increasing revenue.
- Investment Viability: It indicates whether you have the cash flow to support new investments or expansions.
Cash flow statement format
The format of a cash flow statement is designed to separate the most important cash sources into distinct groups so you can understand your resources in an extra level of detail and make informed decisions. Let’s look at the sections you need to include:
Cash Flow from Operating Activities
This section details the cash generated or spent in the core business operations. It includes revenues from sales, payments to suppliers and employees, and other operating expenses. Analysing this section shows if your core operations are generating enough cash to sustain your business.
Cash Flow from Investing Activities
Record cash used for investment purposes, such as purchasing equipment or selling assets, in this section. It helps you understand how much money is being invested back into the business for future growth. This is crucial for assessing your company's investment strategy and long-term viability.
Cash Flow from Financing Activities
This part includes cash flows related to borrowing and repaying bank loans, issuing stock, or paying dividends. It provides insight into how your business is financed—whether through debt or equity—and how it manages its financial obligations.
Disclosure of Non-Cash Activities
Not all significant transactions involve cash. This section discloses activities like issuing shares for assets or converting debt to equity. Including this information ensures a comprehensive view of all financial activities affecting your business.
Understanding Cash Flow Statement vs. Income Statement vs. Balance Sheet
Your cash flow statement, income statement, and balance sheet are all essential documents that work together, with each statement providing unique insights and serving different purposes.
Cash Flow Statement
The cash flow statement tracks the inflows and outflows of cash within your business over a specific period.
It’s divided into three sections: operating activities, investing activities, and financing activities. This statement helps you understand how well your business manages its cash position and highlights your liquidity.
Key Points:
- Focus: Cash inflows and outflows
- Purpose: Assess liquidity and cash management
- Structure: Divided into operating, investing, and financing activities
Income Statement
The income statement, also known as the profit and loss statement, shows your business’s revenues, expenses, and profits or losses over a specific period. It focuses on insights into your operating performance and profitability.
Key Points:
- Focus: Revenues, expenses, and profitability
- Purpose: Assess operational performance
- Structure: Typically includes revenues, cost of goods sold (COGS), gross profit, operating expenses, and net income
Balance Sheet
The balance sheet provides a snapshot of your business’s financial position at a specific point in time. It details your assets, liabilities, and equity, giving a comprehensive overview of what your business owns and owes.
Key Points:
- Focus: Assets, liabilities, and equity
- Purpose: Assess financial position and stability
- Structure: Divided into assets (current and non-current), liabilities (current and non-current), and shareholders' equity
How to create a cash flow statement
Follow these steps to create a cash flow statement:
1. Gather the relevant information.
Pull together your balance sheet, comprehensive income statement, change in equity statement, and statement of cash flow from your previous reporting period. Add any additional information about material transactions from your contracts, legal files, investment documents, etc.
2. Use the balance sheet to calculate any changes.
Work out any changes to your balance sheet over the current reporting period. Look at all of your assets, equities and liabilities. Subtract the closing balance sheet figure from the opening balance sheet figure.
3. Add your balance sheet changes to your cash flow statement.
Take the changes you recorded in the previous step and enter them into a blank cash flow statement.
4. Adjust your statement for non-cash items.
Identify any potential non-cash items recorded on the balance sheet — such as foreign exchange differences or income tax expenses — and adjust the cash flow statement accordingly.
5. Make your final calculations.
Add up all the individual entries on your cash flow statement, calculating the overall change in the balance sheet while adjusting for non-cash items. This will give you the total cash movement for each particular item.
Cash flow statement template
To get you started, we’ve put together a free cash flow statement template, which will calculate the correct values based on your input. Just add in the values from your business and the sheet will do the rest.
Our cash flow forecast template will also help you to understand the money coming in and going out of your business moving forward.
Cash flow Statement FAQs
What Is the Difference Between Direct and Indirect Cash Flow Statements?
When preparing a cash flow statement, you can choose between two methods: direct and indirect. Both methods aim to provide a clear picture of your business’s cash flow, but they approach the task differently.
Direct Method
The direct method involves recording all cash receipts and payments from operating activities directly. This means listing cash received from customers, cash paid to suppliers, cash paid for salaries, and other operational cash flows. The main advantage of the direct method is its straightforwardness and the clarity it provides, showing the actual cash inflows and outflows.
Example Scenario:
- Cash Received from Customers: £50,000
- Cash Paid to Suppliers: £20,000
- Cash Paid for Salaries: £15,000
- Net Cash from Operating Activities: £15,000
Indirect Method
The indirect method starts with the net income and adjusts for changes in non-cash items and working capital. This approach involves adding back non-cash expenses (like depreciation) and adjusting for changes in accounts receivable, accounts payable, and inventory. The indirect method is often preferred due to its simplicity in preparation, especially if your business uses accrual accounting.
Example Scenario:
- Net Income: £10,000
- Add: Depreciation: £5,000
- Changes in Working Capital:some text
- Decrease in Accounts Receivable: £3,000
- Increase in Accounts Payable: £2,000
- Net Cash from Operating Activities: £20,000
What do I do with depreciation in cash flow statements?
Depreciation is tax-deductible and will reduce the cash outgoings related to income taxes, but it doesn’t directly impact the amount of cash flow generated by a business. It’s considered a non-cash expense, and –when creating a budget for cash flows – depreciation is typically listed as a reduction from expenses.
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