Statement of Cash Flows
A cash flow report is a mixture of totals from both the Profit & Loss Statement and the Balance Sheet. With the income statement you only see the income and expenses and with the balance sheet you only see assets, liabilities and equity . . . but with the cash flow report you see everything from those two reports combined into one report which shows you exactly what happens to all the money flowing through your business. This statement, like the Profit and Loss Statement, is like a video clip of what happened over a period of time (usually a month, a quarter, or a year) in the business. The Statement of Cash Flows concentrates specifically on what happened to the cash in the business over that specific period of time.
What is Cash Flow?
Cash Flow is the term used for money going in and out of your business. The aim of any business is to have more money flowing that flowing out! This is, in broad terms, accomplished by the following combination of activities:
- A good Cash Flow depends on regularly gaining new customers to buy your goods and services
- A good Cash Flow also depends on looking after your clients – customer service, quality of goods and services is vital
- Keeping on top of who owes you money (your debtors) is crucial to good cash flow. This is paired with having efficient and effective debt collection strategies in your business
- Manage your Cash Flow by having (and keeping to) an effective budget. Stick to your budgets and control your Cash Flow! This also helps you to avoid reckless and spur-of-the-moment spending in your business
More About the Cash ...
Where Does the Cash Come from?
Cash is introduced to your business from a variety of sources, including the following:
(The source report is listed in brackets)
- Sales of goods and services (Profit and Loss Statement)
- Deposits and Advanced Payments from clients (Balance Sheet)
- Funds introduced by Owner (Balance Sheet)
- Funds obtained from Loan Providers – your bank, Suppliers, Financing Companies, etc (Balance Sheet)
- Interest earned on Investments, etc (Profit and Loss Statement)
- Income Tax or VAT refunds (Balance Sheet)
Where Does the Cash Go?
Cash is used for a number of activities in your business, including:
- Purchasing Raw Materials, Stock and Inventory (Balance Sheet)
- Purchasing of Machinery, Equipment, Tools, and other assets (Balance Sheet)
- Wages and Salaries for staff (Profit and Loss Statement)
- VAT, Payroll Taxes and Income Tax payments (Balance Sheet)
- Loan Repayments (Balance Sheet)
- Drawings – Cash taken out of the business for the owner’s personal use (Balance Sheet)
- Interest payments on bank overdrafts, loans, etc – Balance Sheet
- Other Operational Expenses – Rent, Telephone, Maintenance, etc (Profit and Loss Statement)
The lists can be very long. The above lists are not exhaustive, but are simply an example of some income and expenses in a business.
So Where is the Cash?
Even though your business may be showing a healthy Net Profit on your annual Profit and Loss Statement, your bank balances on the Balance Sheet may show a much smaller amount. So, where is all the cash?
A more in-depth look at your statements will show where your business cash may be. For example:
- Accounts Receivable – Does your business have a lot of clients who owe you a lot of money?
- Inventory – Have you spent a lot of money on goods? Do you have too much inventory and stock lying in your stockroom?
- Assets – Have you bought a lot of machinery, equipment or other assets during this year?
- Loans Repayments – Are you spending a lot of money repaying loans?
- Tax – Has the company paid any income tax or VAT recently?
- Drawings – Have you taken money out of the business for your personal use?
All of the items mentioned above do not show on your Profit and Loss Statement, so do not affect your ‘bottom line’ (Net Profit), but they do all show up on your Balance Sheet, and will explain the difference between your Net Profit and your current bank balance. The Statement of Cash Flows takes al these amounts from the different reports and puts them together in one report where it is much easier for you to see just how the cash is flowing (and being used) in your business.
Regularly Check Cash Flows
It is crucial for you to regularly (at least once a month) the Cash Flow in your business. Doing so will help you to manage the cash flow, and will also assist you in addressing issues that may affect your cash flow, for example: how to make more sales, how to cut down on spending, how to better manage stock and inventory, etc.
Remember, bad Cash Flow will destroy your business!
A very good practice is for you (or your accountant) to prepare a Cash Flow Forecast ahead of time (either monthly, quarterly, or even annually) so that you can see if you will have enough cash to cover expenses, payroll, tax, and other costs in your business. This will also give you time to make changes in your business, focus on sales, cut down on spending, etc, and will give you a much grater control of your business and its cash.
What is in a Cash Flow Forecast Report?
As with most reporting in your business, you can include either more – or less – detail. A normal Cash Flow Forecast Statement will include the following:
- Opening balances of cash on hand for the period under review
- Totals of all transactions in the business for the period (these totals are taken from the Profit and Loss Statement and the Balance Sheet)
- Forecast transactions for the months ahead (taken from your business budget)
- Closing balances for cash on hand for the current period
- The Forecast Totals for the coming months
Statement of Cash Flows Example
Here is a basic Statement of Cash Flows for Doug’s small business.
CASH FLOW STATEMENT EXAMPLE TO FOLLOW SOON!