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 also the main reason why small businesses fail, according to an oft-cited study from CBInsights, the main reason that new businesses and startups fail is because of lack of cash flow.

If this is the first time you are hearing 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 point in 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 it's negative, it means that your business has more outflows than incomes, and it's 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 the most critical financial document for your business, no matter how big or small it is. It measures how well a company generates cash to pay its debt obligations and fund it's operating expenses. It also works to look at how cash moves in and out of business.

How to calculate a 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, cash flow can be measured in the following formula:

Cash received – Cash spent = Net cash flow

  • 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 here.

How do I calculate a cash flow statement?

If you're not required to file formal cash flow statements for a small business, you can streamline the process to make it easier for you. A cash flow statement can be divided into three major categories:

  • Operating activities: 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.

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

  • 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 the purchase of new equipment.

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

Small business cash flow statement example:

Following is an example of what a cash flow statement looks like. This is the cash flow statement for Small Business Corp. at the end of 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 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 payments from customers 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 down a comprehensive cash flow statement annually or even quarterly. Ask a trusted financial expert about the best way to keep a detailed record of your cash flow.

The effects of cash flow issues on a company

On average, U.S. small business owners are losing $43,394 annually by a preceding project or sales due to issues created by insufficient cash flow, according to a report published by Business Wire.

Imagine your business generates a monthly income of $10,000 during a specific period of the year due to sales. But, on the other side, you also have $10,000 worth of pills you have to pay during that same time. If you fail to achieve that sales goal, your bills will pile up, and you will generate debt with suppliers or investors. This means you'll be putting your business at risk due to a severe cash-flow problem. So how can we fix this?

What can I do to fix a cash flow problem?

If your small business frequently experiences a cash flow crisis, this means you're having a negative net income. Some steps you can follow to fix the cash flow problem.

  • Increase your business sales. One way to do this is to invest in effective marketing strategies and a good advertising campaigns. Learn more about the importance of digital marketing and best practices.

  • Control your business expenses. It won't matter how much your business sales are if you don't control your expenses. This is a common problem small business owner face. Keep a monthly record of your business expenses this means controlling your fixed costs and variable costs.

  • Invest in technology. You can use an accounting software: These platforms will save you a lot of time. They have specialized tools to manage the flow of money and quickly identify and resolve problems. Or invest in CRM technology to provide better customer service and attract more consumers to your business.

Disclaimer: This material 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. We suggest consulting with your tax, legal, and accounting advisor before engaging in any transaction.