Understanding a cash flow statement for small businesses

1
March 2022

For a business to be successful, it must always have sufficient cash. That seems obvious, right? Cash flow is the lifeblood of every business and the main reason small businesses fail; according to an oft-cited study from CBInsights, the main reason that new companies and startups fail is because of a lack of cash flow.

If this is the first time you hear about the importance of Cash Flow Management, don't worry, we've covered the basics in this article. Remember, when you invest in your cash flow management, you're investing in your business's growth.

What is a cash flow statement?

Cash flow refers to the net balance of cash moving into and out of business at a specific time, whether positive or negative. Unlike revenue, which only measures how much money is coming in. If your cash flow is positive, then that means that your business is making money. Still, if negative, your business has more outflows than incomes, losing money.

What is the importance of a cash flow statement?

The best way to manage your cash flow is by generating a Cash Flow Statement, a financial document designed to provide a detailed analysis of what happened to a business's cash during a specified period (typically during a month).

The Cash Flow Statement is your business's most critical financial document, no matter how big or small. It measures how well a company generates cash to pay its debt obligations and fund its operating expenses. It also looks at how cash moves in and out of business.

How to calculate the cash flow in a business?

There are a variety of formulas and statements you may use to measure your financial health when it comes to your business accounting. If we're going to cash flow basics, you can measure cash flow can be calculated with the following formula:

 Net cash flow= Cash received – Cash spent. 

  • Cash received is the total revenue of your business during a specific period. Revenue is money brought into your company by its daily business activities.

  • Cash spent includes your business total expenses, for example, your business rent, taxes, salaries, and investment in equipment.

There are several formulas to calculate a business cash flow. We encourage you to check some cash flow examples.

How do I calculate a cash flow statement?

If you're not required to file formal cash flow statements, you can streamline the process to make it easier.The main components of the cash flow statement are the following:

1. Cash flow from operating activities (CFO): The net cash generated from normal business operations. To get to net cash flow for operating activities, subtract your business outgoing value and the incoming value.

Your operating activities might include inventories, Receipts from sales of goods and services, salaries and wages to employees, and income tax payments, among other expenses. Check out Examples of Cash Flow from Operating Activities.

2. Cash flow from investment activities: The net cash generated from a company's investment-related activities. 

This category includes the purchase or sale of an asset, loans paid to suppliers, or received from consumers. Investing operations are changes in a company's cash situation, including business assets, investments, or purchasing new equipment.

3. Financial activities: Cash Flow from financing activities include transactions involving debt repayment (Business loans), equity, and dividend payments.

Cash flow statement example

The following is an example of a cash flow statement for Small Business Corp. at the end of the Financial Year (FY) 2021.

Cash Flow Statement Small Business Corp.

FY ended DEC 2021

(In USD)

Operating Activities

Earnings

Outflows (inventories)

Cash Generated

 

400.000

(40.000)

360.000

Investing Activities

Equipment Costs

 

(100.000)

Financing Activities

Notes payable

 

(50.000)

Cash Flow for FY 2021

 

210.000

How often do you prepare a cash flow statement?

Consider tracking it month-by-month for the first two years or so. Eventually, you may want to move on to keeping track of every quarter. Use your cash flow statement during times of growth or slow cycles to catch any evolving issues before they become problems. These issues could be: Waiting for customer payments before you can pay your bills, consistently paying your bills late, and when your accessible funds do not seem to align with your business' profit and loss statement.

After you categorize your cash flow statement, you'll be able to know your businesses:

  • Accounts receivable: What are you owed, and when can you realistically expect to receive it?

  • Accounts payable: What do you owe, and can you meet your obligations?

  • Shortfalls: Do you owe more than you can pay?

You can track your cash flow on a basic spreadsheet or use a small business accounting program. We recommend hiring an accountant to run a comprehensive cash flow statement annually or quarterly. Ask a trusted financial expert about the best way to keep a detailed record of your cash flow.

Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.