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How to Prepare a Cash Flow Statement

How to Prepare a Cash Flow Statement

I'm going to help you see into the future so that you can make better financial decisions. No, I'm not talking about some crazy, superpower, I'm talking about cash flow forecasting. If you've heard the saying 'cash is King,' well, that statement is completely true. One of the biggest reasons that businesses fail is poor cash management.

These businesses might've had great ideas and products and they could have gone on to be profitable, but without cash available, they were unable to pay their staff, creditors, or interest on their bank loans. That's why I'm going to show you how to forecast your cash flow properly.

Accounting Explained

Financial accounting is often called the language of business. But for many entrepreneurs learning how to manage finances can feel a bit intimidating. Let's face it, talking about numbers and staring at spreadsheets isn't as glamorous as talking about marketing campaigns or new product development.

But the simple reality is that none of those things matter if the numbers say you'll be out of business in a month. Businesses live and die by their finances. And if you want to make an impact long-term, you need to be intimately acquainted with them.

Cash Flow Statement Basics

Cashflow is the amount of money, cash, and non-cash traveling into and out of a business. Simply put cash flow is calculated by taking note of the cash available at the beginning and end of a specific period. This period might be a week, a month, or a quarter.

How to Prepare a Cash Flow Statement

Your business has a positive cash flow, if there's more in the account at the end of the period, then when the period began. If there's less cash, it will have a negative cash flow. Errol Gerson put it best. 'When the outflow exceeds the inflow, the upkeep will be your downfall.'

Accounting 101

Now to be able to manage cash flow, we need to have a basic understanding of accountant.

First, there are 3 critically important accounting documents.

We have the income statement, sometimes known as the profit and loss statement. And this document shows the revenues and expenses.

How to Prepare a Cash Flow Statement

Its goal is to summarize how revenues are transformed into net profit. Then we have the balance sheet, which gives us a snapshot of what a business owns, what it owes, and the amount invested by its owners on a particular day.

How to Prepare a Cash Flow Statement

Finally, we have the cash flow statement, which shows all income and debt over a specific time period.

1. This statement tells us about the ability of a company to pay its employees, suppliers, and depts.

2. It tells us how much cash they have on hand over a specific time period, like a month, quarter, or year.

In this article, I'm going to show you how to use a cash flow forecasting spreadsheet that is so easy, anyone can use it. By using this projection tool, you'll be able to have all the information you need, right at your fingertips to make better financial decisions. Before we do that, I want to arm you with the knowledge you'll need to actually make use of this incredibly helpful forecasting tool.

First, it's crucial to understand this. Profit isn't the same as cash.

Profit = Total revenue - Total cash

Profit is revenue less expenses and relates to a specific period of time. Cash is a bank balance at a specific point in time, profit is simply a financial concept and only exists on paper. Cash is the money you have available to spend. So a profitable business can still be unable to pay its bills. That is because an income statement doesn't include several key figures.

1. Debt repayment

Only interest is shown on the income statement, but principal debt is not shown and that can eat up a lot of cash.

2. Equipment payments

The cost of equipment is often spread out over the useful lifetime of that equipment. So if you spent $10,000 on equipment upfront, that will last you 10 years, only $1000 will show up on this year's income statement. This act of expensing a fixed asset over a period of time is called depreciation and helps to reduce your taxes over the useful life of the equipment.

3. Taxes 

That brings us to number 3. Taxes since you haven't been taxed yet, not all of your profit is yours to keep. 


Then we have dividends and this won't be recorded on the income statement or affect profitability.

Cash received

Lastly, the income statement doesn't take into account the cash received.

1. You see making revenue doesn't always mean having more cash immediately.

2. And incurring expenses doesn't always decrease cash right away. The reason for this is simple, it has to do with the way a company records its accounting.

The Two Methods Of accounting: Cash Basis Accounting Vs. Accrual Basis Accounting

1. Cash basis accounting, and cash basis recognizes income when it's received and recognizes expenses when they're paid.

2. Accrual basis accounting and recognizes income when it's earned and recognizes expenses when they occur. Accrual is the more accurate form of accounting, giving more detailed insights into a company's finances and a better long-term financial view. As a result, accrual is more often used by companies.

So if your company sells $10,000 worth of product on credit, your income statement will say that you've made $10,000. However, that money might not be in your bank account for quite some time.

Here is the deal

If you aren't profitable on paper, you're in bad shape, but while you may be profitable over the course of a month or a year, you may not be over a specific day of the week. If your bills are due at the beginning of the month, but you won't have any money in your bank account until the end of the month, well, you have a cash flow problem.

Even if at the end of that month, you've made more than you've spent. So what can cashflow management help with? It Can help with a variety of things, such as

1. predicting shortfalls
2. knowing when you can invest in growth
3. establishing trust with banks and suppliers.

How To Manage Cash Flow 

Cashflow is best managed with a cash flow statement, which shows where your company makes and spends its money.

A cash flow statement has four parts.

1. Cash from operations

this is the most important part because it summarizes cash generated by selling products and services. It also shows expenses incurred to operate. 

2.Cash from investments

This is cash received from the sale of investments or is spent on investments. This cash is outside primary business activities, like buying or selling assets like machinery and equipment or even acquiring another business.

3. cash from financing, and this is cash generated from raising borrowing or spent repaying capital. This is shares issued, bank loans, dividends paid, or debt principal repaid.

4. reconciliation of the balance sheet

1. This is the starting point in cash from the last period.
2. The ending balance from the current balance sheet.

The difference between these two is the net change in cash, which must be equal to the sum of the cashflow sections above.

Now I wanted to talk a little bit more about the cash from operations section is this is by far the most important.

There are two ways to calculate it.

1. The first is the direct method where individual instances of cash received and paid out are tallied to show the total cash flow.

1. Such as cash received by customers
2. Cash paid to suppliers
3. Cash paid to employees
4. Taxes and interest paid.

The direct method is what we're going to be discussing today because it's more transparent. And we'll give you a much clearer idea of where your money is coming and going, but just for your knowledge.

2. The second is called the indirect method.
We're accounting line items, such as net income, depreciation, et cetera, are used to arrive at cash flow. This is typically used by larger corporations because when you're that size, it's a lot less time-consuming.

How To Read A Cash Flow Statement 

Now, before we make a cash flow statement, we need to know how to read one. The easiest way to read a cash flow statement is to start at the bottom and go up to the top.

In this example

How to Prepare a Cash Flow Statement

We see balances for cash flow at this start and end of a time period, which we get from the balance sheet. When we look at the difference between these two numbers, we get the net increase or decrease of cash balance for that time period.

The information above summarizes, how and why the cash balance changed, and all of it reconciles to the net increase or decrease. Now to make things super easy, download the template. This is for a 12-month cash flow forecasting template, and it will help you visualize cash flow management and tailor your approach.

The manual process of recording your expenses and revenues will allow you to become intimately acquainted with your business's money situation. Make a copy of this template and let's get started.

Forecast expenses
Start by making a list of everything you have to pay for.

1. Rent
2. Salary
3. Advertisements
4. Software fees
5. Loan repayments, anything that comes out of your bottom line. Write down what the expenses for how much it is and when it's due.

Now in accounting, there are two types of costs.

1. We have fixed costs, which remain the same, regardless of sales, like rent, insurance, and banking fees.

2. We have variable costs, and these change based on your sales activity and are often tied directly to your product or service. These are costs like payroll, shipping costs, utilities and equipment, and supplies and marketing spent.

2. Forecast your revenue

Start by writing down any guaranteed revenue. If you sell subscriptions or have long-term contracts, write these down first. If a large portion of your sales comes from first-time customers, it will be a bit more difficult, but you can take a look at past data to assist your projections.

If you expect your sales will increase, remember to be conservative, you don't want to end up in a bad situation. As you forecast revenue, make sure to take into account events like holidays, seasons, or sales events like Black Friday that could positively or negatively affect your sales.

3. Plug in your data

How to Prepare a Cash Flow Statement

Head over to the spreadsheet and customize any expense rows, or revenue rows to suit your business. Similarly, if you plan to take out any bank loans, add a row for bank loans under the revenue section and a debt repayment row under the expenses section. If you use multiple channels, such as web, retail, and trade shows, you might want to have a line for each because it will be easier to separate and predict.

Make sure you add revenue to the month. It will become available to you and expenses to the month that you actually need to pay them. Next, add your opening bank balance for the first week. The following weeks will be predicted automatically based on your revenue and your expense projections.

4. Regularly update your projection

A good cash flow spreadsheet is updated on a regular basis. It is a living document. If it doesn't match your previous calculations, it's a good idea to figure out why. Sometimes expenses you forgot about pop up, or you realize you may have been too optimistic in your revenue projections. Any time you are predicting a shortfall, your closing bank account balance will turn red.

Things That Hurt Cash Flow

1. The first is too much inventory
If your cash is tied up in more products than you are selling, you're in bad shape.

2. Long payment terms
If you give clients too long a time period, and too small of payments. Well, that's really bad for cash flow.

3. High overdue receivables
If too many customers aren't paying on time, that's bad for cash flow.

This means you're using a lot of cash to finance the business and this cash tied up means you have less money from marketing, increasing capacity, and expanding to new markets.

How to improve cash flow

1. Focus on inventory control

Determine what's selling and what's not. Then you can keep more inventory on hand that's likely to move fast and get rid of dead stock at a discount.

2. Lease don't buy

Well, you don't want to get into too much debt, but sometimes you need to invest in equipment or inventory that will pay off in the long run. Good cash management practices would be to lease rather than buy. When you lease, you can make small payments over time and keep the cash flow for your day-to-day operations. You can also write it off on your taxes.

3. Send out invoices right away

One key part of small business cash flow management is getting paid as soon as possible. If you set up invoices immediately, receivables will come in faster. If you have clients that are paying late, a technique you can use is giving them a discount if they pay early.

4. Look for alternative streams of revenue

If your scenario is changing and putting pressure on your current revenue streams, look for alternative ways to make money. You may be able to temporarily or even permanently replaced less profitable revenue streams with easier, more effective ones.

5. Check if suppliers offer early pay discounts

One way to preserve working capital is to pay suppliers less. Some suppliers may have early pay discounts you aren't aware of. So make sure to ask.

6. Use a high-interest savings account

To maximize your cash flow, put your money into a high-interest business savings account. Find an account that gives you more than 1% for leaving your cash in it. Ideally with a low minimum deposit. This can improve your cash position month by month.

Last words

Managing money is a vital part of running a healthy business. By simply reading this full article, you've taken a step in the right direction. But to actually accomplish your goals, you'll need to consistently apply this knowledge.

Let me know in the comments if there are any articles that you would like to see that would help you with your entrepreneurial journey. My goal is to help make your journey simpler any way I can. Thanks so much for reading.

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