The Cash Flow Statement

Explore what a cash flow statement is and why it matters

Understand Accounts Payable/Receivable

Tracking how money coming into and going out of your business is vital

Forecast Your Cash Flow

One way to plan for the future properly is through forecasting

Rock Business Accounting

Good accounting is at the heart of any successful business

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Master Business Cash Flow

Mastering Cash-In and Cash-Out.

Cash flow is the movement of cash in and out of the business via standard business operations. As an example, when you sell a product out of your inventory, that is considered cash in, and when you purchase materials to create your products, that is a cash out expense.

While it’s good to understand how much free cash you have on hand, the exact level of your cash flow is not the best indicator of business success since it doesn’t directly correlate with net profit. It is, however, a way for a company to increase shareholder value, as cash is an important asset.

Cash Flow Statement Breakdown

Your cash flow statement shows the amount of cash the business generates over a specific period. It is broken down into three specific areas: Operations, Investing and Financing.

Operations

The operations area of a cash flow statement is the easiest part to understand. It measures the inflow and outflow of cash from regular business operations. In the example below, you can see that there are increases and decreases in accounts receivable and accounts payable, which are normal cash in and cash out procedures.

Investing

Any investments in your business are entered into the “Cash Flow from Investing” portion of the cash flow statement. Things like capital investments in equipment, new buildings or other assets fall into this category. These are typically cash out items.

Financing

The financing portion of the cash flow statement relates to cash in or out, specifically from loans or dividends. When your company takes on investment from outside sources like a loan, this would be reflected in the “Cash Flow from Financing” as a cash in item. Paying out financing in the form of dividends, for example, is a cash out item.

Forecast Your Cash Flow

Being able to accurately forecast your cash flow is extremely valuable for businesses. An accurate cash flow forecast will let you know if your business has enough cash to run the day-to-day operations and also if you have enough to grow the business. There are five steps necessary to accurately forecast your cash flow.

Prepare a Revenue Forecast (Cash In Items)

Look at past revenue numbers for the period you’re creating your cash flow forecast for. Depending on your business, there could be many factors impacting your revenue over specific periods of time. One of those factors is seasonality. For example, retail businesses see a jump in sales over the holidays. So make sure you include any trends that affect your business.

Estimate Other Cash In Items

Outside of cash flows from your normal business operations, you want to estimate any other cash inflows your business may encounter. These could be in the form of investment in the business from the owner or via a loan, any loans that are paid back by the business or any government grants.

Estimate Other Cash Out Items

Just like your revenue (cash in) forecast, you have to estimate what your cash out items will be. These items are things like operational or administrative expenses.

Combine the Data

At this step, you’ll want to combine all the prior data based on the date range. Starting with your opening balance on day one of your forecast, project all the cash flow based on your prior cash in and cash out item projections.

Review Estimates vs. Actuals

Once the forecasted period is complete, go back and check your initial forecast against the actual results. This will help you understand where you may have over or underestimated your projections. Using the differences, you will be able to better forecast your cash flow in the future.

Calculate Free Cash Flow

Calculating your free cash flow is important to understanding how your business is functioning and whether it can continue operations. There are traditionally three ways to calculate free cash flow, which will all lead you to the same information you need. Which of the three calculations you use will depend on what type of information is available to you in your size of business.

If you have a healthy cash flow, that means you have enough money at the end of the determined period (usually monthly).

Understand Accounts Receivable/Payable

Managing cash transactions is the easy part of accounting. But what happens when you have to include credit? That’s where accounts receivable and payable come in. These are tools used in the accrual accounting process.

Accounts Receivable

Accounts receivable is used when you have unpaid customer invoices — basically, any money that is slated to come into your business but has not been collected yet.

To better understand, let’s use a catering company as an example. John operated a catering company and charged $5,000 for his services. He gave his customer an invoice that is payable within 30 days. How is this accounted for in your financial statements if the cash hasn’t been received yet? You add it to your accounts receivable. Your accounts receivable are cash assets that have yet to be collected by your business.

Accounts Payable

Accounts payable is used to track any outstanding payments your business has to outside vendors that they have not collected on yet.

For clarification, using the same example above, let’s say that John purchased all of the food for his contracted event for $1,000. Instead of paying for it up front, he was given 30 days to pay. This would be an outstanding invoice that he owes to a vendor, which would be in his accounts payable. Accounts payable are any unpaid invoices that you owe to any vendor you do business with.

Business Accounting

Accounting can be an intimidating aspect of owning your own business. Luckily, there are a lot of great resources to help better manage this area. If you want to tackle accounting on your own, there are some great accounting tools out there ready to help. Platforms like QuickBooks, Freshbooks and Xero offer affordable web-based accounting solutions. If you are not into doing your own accounting, there are plenty of Certified Public Accountants in your area that would be more than willing to help.

It’s essential to have an understanding of how money comes in and out of your business. With this knowledge, you can have a direct impact on how profitable your business is. Keeping your business cash flow positive allows money to be reinvested into your business for future growth, which is the goal for every company!