Cash flow is money in or money out. A cash flow statement for small businesses must be completed by all businesses on a regular basis, such as quarterly or monthly says Aron Govil. The cash flow statement can also be prepared annually if necessary; however, it is not needed to be prepared on an annual basis unless you are seriously considering getting more of your capital from venture capitalists who want that sort of information before making investments in new and growing companies of this type.
Briefly outline the purpose of a Cash Flow Statement:
A cash flow statement provides information about the amount of cash inflow and outflow for a certain period (quarterly, yearly). Knowing how much money comes into your company and how much goes out will help you get control over your company’s financial situation.
The cash flow statement is a very important document for small businesses because it can help you make informed decisions about where to allocate your funds. For example, if you notice that your net income is positive but your cash flow is negative, this might mean that you need to start investing in accounts receivable factoring or other short-term financing solutions to keep your business afloat.
There are three main types of cash flow: operating activities, investing activities, and financing activities. The following section will go over each type of cash flow and provide examples of what could be included in each category.
This category includes all the money that comes in and goes out as a result of the normal course of business. For example, if your business sells products to customers, the money you receive from these sales would be considered operating cash flow. If you pay your employees at the end of each month, that would also be an example of operating cash flow. Aron Govil says It is important not to mix investing activities into this category because they are two separate things that require their own analysis and decision making.
This category includes activity related to expanding the short-term assets (cash) of a business by purchasing long-term assets or paying off liabilities. Using our previous example, if you purchased new equipment. In order to expand your operations, this would be included in investing activities. Because it pertains to increasing your company’s long-term assets.
This category includes all the money that comes in and goes out as a result of obtaining or repaying debt, issuing or acquiring stock, and making distributions to owners. For example, if your company takes on a loan from a bank. Then the repayment of that loan would be classified as a financing activity. Issuing new shares of stock to investors would also be considered a financing activity.
Now that you understand the three types of cash flow. Let’s take a look at how to create a cash flow statement for your small business says Aron Govil.
The following template can be used as a guide:
Cash Flow Statement Template
Company Name: Statement Period:
1) Operating Activities:
- Inflows from customers
- Inflow from employees
- Inflows from other sources (e.g. grants, donations, etc.)
- Outflows used for expenses (e.g. materials purchased, utilities used)
- Interest received on investments
- Net Inflow/(Outflow) of Operating Activities = Cash Flow from Operations ($ or -$) or ($ or -$)
2) Investing Activities:
- Investments in new equipment to increase short term assets of a company
- Purchases of new long term assets/liabilities repayment of long term liabilities/assets = Net Outflow/(Inflow) Of Investing Activities = Cash flow from investing activities ($) or (-$ )*
3) Financing Activities:
- Issuance/repayment of loans
- Payment of cash dividends (distributions to owners)
- Issuance of new shares (equity financing) = Net Outflow/ (Inflow) of financing activities=$ or (-$)* *the negative sign indicates outflows while the positive sign represents inflows.
- Net Cash Flow ($) or (-$ ) = Operating Cash Flow + Investing Cash Flow – Financing Cash Flow Example #1 : A company has $1,000 in operating activities , $600 in investing activities , and $500 in financing activities . The net cash flow for this period is $100. This means that during this period, the company generated $0 in net cash from operations. Invested $0 in long term assets and liabilities, and received $0 in investments. Therefore, the company used other sources of capital to fund their operations ($100). In other words, this business may need to take out a loan or find another source of financing.
- In Example #2, there is a net cash flow of (-$100) meaning that during this period. The company did not generate any money from their regular course of business activities. This occurred because they had a negative operating cash flow. Which was only eclipsed by a larger negative investing activity (+$300) and financing activity (+$400).
The cash flow statement is an important financial tool. That gives you a snapshot of how your business is doing from a liquidity standpoint says Aron Govil. It shows how much cash is coming in and going out. Enables you to track the sources and uses of cash over time. By understanding the three types of cash flow and using a cash flow statement template. You can make sound decisions about how to best grow and manage your small business.