Financial Wisdom

Preparing and Utilizing an Effective Cash Flow Statement

While an income statement can present a true picture of the operating results of your business, understanding what is happening with your cash flow is also critical and can help you with the day-to-day operation of your business. Managing your business without adequate cash flow to meet operating needs and to take advantage of marketplace opportunities can make life miserable.

Benefits of an Effective Cash Flow Statement

  • You will better understand the day-to-day financial dynamics of your business.
  • You will better understand the long-term financial dynamics of your business.
  • You can anticipate upcoming needs.
  • Preparing one will probably help you identify some ways to improve your cash flow.
  • Your lender will probably require one.
  • You can have some peace of mind.

Preparing a Cash Flow Statement
Most businesses prepare Cash Flow Statements at least annually and many prepare one each quarter. Here is a format that you may find helpful. You might want to start with one for the prior year to become familiar with the process and then start doing quarterly projections of your cash flow.

Cash Flow Statement

Line # Prior year Current year $$$ increase/ decrease %'age increase/ decrease Comments for Lines
Year ending Enter the year
Sources & uses of cash
1 Net income $ $ $ % Enter your income
Plus non-cash expenses included in net income
2 Depreciation $ $ $ % Enter as a positive. (Depreciation is a non cash expense.)
3 Net change in accounts receivable $ $ $ % Increases for the year are entered as negatives and decreases are entered as positives.
4 Net change in accounts payable $ $ $ % Increases for the year are entered as positives and decreases are entered as negatives.
5 Net change in inventory $ $ $ % Increases for the year are entered as negatives and decreases are entered as positives.
6 Net change in other accrued items $ $ $ % Increases in other accured assets are entered as negatives and increases in other accrued liabilities are entered as positives.
7 Net cash provided by operating activities $ $ $ % Add Lines 1 through 6.
Cash flow from investing activities
8 Purchase of capital assets $ $ $ % Enter as a negative.
9 Sales of capital assets $ $ $ % Enter as a positive.
10 Loans given by you $ $ $ % Enter as negative.
11 Loans repaid by you $ $ $ % Enter as a positive.
12 Net cash from investment activities $ $ $ % Add Lines 8 through 11.
Cash flow from financing activities
13 Debt reduction $ $ $ % Enter as a negative.
14 Proceeds from borrowing $ $ $ % Enter as a positive.
15 Proceeds from sale of equity $ $ $ % Enter as a positive.
16 Dividends $ $ $ % Enter as a negative.
17 Net cash from financing activities $ $ $ % Add Lines 13 through 16.
18 Net change in cash $ $ $ % Add Lines 7, 12 and 17.

After you have prepared this statement or one similar to it, you can then focus on each of the line items and begin the process of improving them as you see appropriate.