A cash flow statement tells you how much cash is entering and leaving your business in a given period. Along with balance sheets and income statements, it’s one of the three most important financial statements for managing your small business accounting and making sure you have enough cash to keep operating.
What's Bench? Online bookkeeping and tax filing powered by real humans. Friends don’t let friends do their own bookkeeping. Share this article.I am the text that will be copied.
Example H2 Example H3 Example H4 Example H5 Example H6 Tired of doing your own books?Cash flow statements are also required by certain financial reporting standards.
What makes a cash flow statement different from your balance sheet is that a balance sheet shows the assets and liabilities your business owns (assets) and owes (liabilities). The cash flow statement simply shows the inflows and outflows of cash from your business over a specific period of time, usually a month.
Let's take a closer look at what cash flow statements do for your business, and why they're so important. Then, we'll walk through an example cash flow statement, and show you how to create your own using a template.
There’s a fair amount to unpack here. But here’s what you need to know to get a rough idea of what this cash flow statement is doing.
You’ll also notice that the statement of cash flows is broken down into three sections—Cash Flow from Operating Activities, Cash Flow from Investing Activities, and Cash Flow from Financing Activities. Let’s look at what each section of the cash flow statement does.
These three activities sections of the statement of cash flows designate the different ways cash can enter and leave your business.
Using the cash flow statement example above, here’s a more detailed look at what each section does, and what it means for your business.
For most small businesses, Operating Activities will include most of your cash flow. That’s because operating activities are what you do to get revenue. If you run a pizza shop, it’s the cash you spend on ingredients and labor, and the cash you earn from selling pies. If you’re a registered massage therapist, Operating Activities is where you see your earned cash from giving massages, and the cash you spend on rent and utilities.
Cash Flow from Operating Activities in our example
Taking another look at this section, let’s break it down line by line.
Net income is the total income, after expenses, for the month. We get this from the income statement.
Depreciation is recorded as a $20,000 expense on the income statement. Here, it’s listed as income. Since no cash actually left our hands, we’re adding that $20,000 back to cash on hand.
Increase in Accounts Payable is recorded as a $10,000 expense on the income statement. That’s money we owe—in this case, let’s say it’s paying contractors to build a new goat pen. Since we owe the money, but haven’t actually paid it, we add that amount back to the cash on hand.
Increase in Accounts Receivable is recorded as a $20,000 growth in accounts receivable on the income statement. That’s money we’ve charged clients—but we haven’t actually been paid yet. Even though the money we’ve charged is an asset, it isn’t cold hard cash. So we deduct that $20,000 from cash on hand.
Increase in Inventory is recorded as a $30,000 growth in inventory on the balance sheet. That means we’ve paid $30,000 cash to get $30,000 worth of inventory. Inventory is an asset, but it isn’t cash—we can’t spend it. So we deduct the $30,000 from cash on hand.
Net Cash from Operating Activities, after we’ve made all the changes above, comes out to $40,000.
Meaning, even though our business earned $60,000 in October (as reported on our income statement), we only actually received $40,000 in cash from operating activities.
This section covers investments your company has made—by purchasing equipment, real estate, land, or easily liquidated financial products referred to as “cash equivalents.” When you spend cash on an investment, that cash gets converted to an asset of equal value.
If you buy a $10,000 mower for your landscaping company, you lose $10,000 cash and get a $10,000 mower. If you buy a $140,000 retail space, you lose $140,000 cash and get a $140,000 retail space.
Under Cash Flow from Investing Activities, we reverse those investments, removing the cash on hand. They have cash value, but they aren’t the same as cash—and the only asset we’re interested in, in this context, is currency.
For small businesses, Cash Flow from Investing Activities usually won’t make up the majority of cash flow for your company. But it still needs to be reconciled, since it affects your working capital.
Cash Flow from Investing Activities in our example
Purchase of Equipment is recorded as a new $5,000 asset on our income statement. It’s an asset, not cash—so, with ($5,000) on the cash flow statement, we deduct $5,000 from cash on hand.
This section covers revenue earned or assets spent on Financing Activities. When you pay off part of your loan or line of credit, money leaves your bank accounts. When you tap your line of credit, get a loan, or bring on a new investor, you receive cash in your accounts.
Cash Flow from Financing Activities in our example
Notes payable is recorded as a $7,500 liability on the balance sheet. Since we received proceeds from the loan, we record it as a $7,500 increase to cash on hand.
At the bottom of our cash flow statement, we see our total cash flow for the month: $42,500.
Even though our net income listed at the top of the cash flow statement (and taken from our income statement) was $60,000, we only received $42,500.
That’s $42,500 we can spend right now, if need be. If we only looked at our net income, we might believe we had $60,000 cash on hand. In that case, we wouldn’t truly know what we had to work with—and we’d run the risk of overspending, budgeting incorrectly, or misrepresenting our liquidity to loan officers or business partners.
Do your own bookkeeping using spreadsheets? In that case, using a cash flow statement template will save you time and energy.
Our Free Cash Flow Statement Template is easy to download and simple to use.
Four simple rules to remember as you create your cash flow statement:
If you’ve already gone through the example statement above and you feel like you have a pretty good grasp of how to create a cash flow statement, go ahead and start experimenting with our Free Income Statement Template and Free Cash Flow Template.
But if you’d like to get a clearer idea of how it all works, this quick example should help.
Let’s say we’re creating a cash flow statement for Greg’s Popsicle Stand for July 2019.
Our income statement looks like this:
Note: For the sake of simplicity, this example omits income tax.
And our balance sheet looks like this:
Remember the four rules for converting information from an income statement to a cash flow statement? Let’s use them to create our cash flow statement.
Our net income for the month on the income statement is $3,500 — that stays the same, since it’s a total amount, not a specific account.
Additions to Cash
Decreases to Cash
Our net cash flow from operating activities adds up to $5,500.
Cash Flow from Investing Activities
Greg purchased $5,000 of equipment during this accounting period, so he spent $5,000 of cash on investing activities.
Cash Flow from Financing Activities
Greg didn’t invest any additional money in the business, take out a new loan, or make cash payments towards any existing debt during this accounting period, so there are no cash flows from financing activities.
Cash Flow for Month Ending July 31, 2019 is $500, once we crunch all the numbers. Greg started the accounting period with $5,500 in cash. After accounting for all of the additions and subtractions to cash, he has $6,000 at the end of the period.
Cash flow statements are powerful financial reports, so long as they’re used in tandem with income statements and balance sheets. See how all three financial statements work together.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.
