A cash flow statement is used to understand the cash changes in a period of time. It is a statement of profit and loss, but instead of net income, it uses net cash changes. The cash flow statement can measure your operating performance or liquidity.
Calculate cash flow
Cash flow is the difference between cash coming in and cash going out. If you’re like most business owners, the focus of your business is generating sales, but a healthy company also has to manage expenses and provide operational funding (like payroll). Cash flow covers all of these expenses by showing how much money has been generated and spent during a given period of time. Invoice finance can help in improving your cash flow.
Cash flow matters because it indicates how well your business is doing financially—and whether or not you’ll be able to pay all its bills on time. In other words: if you don’t have enough cash coming in to pay for what’s going out each month or quarter, that means trouble!
Calculate operating cash flows
The operating cash flow is the net change in cash from operating activities. Operating cash flow is calculated by adding net income to non-operating items such as depreciation, amortization and other adjustments.
Non-operating items include invoice finance, which is a high-interest credit facility that allows businesses to delay payment of invoices until their customers pay them. This can be useful if you’re short on working capital or need time to collect payment from your clients.
Establish non-operating income
Non-operating income is revenue that does not relate to the regular operations of your business. Examples include interest income, dividends, and capital gains.
To include non-operating income in your cash flow statement, add an additional category called “Other” on the left side of your document below “Net Income From Operations”. Then record all other sources of revenue under this heading (or create a new section).
Assess net changes in assets and liabilities to get net cash flow
The second step is to assess net changes in assets and liabilities to get net cash flow. Net cash flow is the difference between cash inflow and outflow. Cash inflow includes:
- Cash from operations (also known as operating activities)
- Investments in capital assets, such as new equipment or a building that will be used for business purposes (such as buying additional land)
Cash outflow includes:
- Repayment of long-term debts or loans
- Purchases of new equipment or inventory
Determine the change of cash
To determine the change of cash, you must first identify all inflows and outflows of cash during a period. First, identify all sources of cash inflow. These are primarily sales revenue and increase in accounts receivable. The amount paid from customers for products or services is called sales revenue.
Accounts receivable are payments you receive before you have completed your promised work or service; they represent your promise to perform those services later on. Second, identify all uses of cash outflow—or expenses—during this same period.
These can be product costs (raw materials or labour), operating expenses (such as rent and utilities), depreciation expenses (costs related to wear-and-tear on assets) and interest expenses (borrowing the money).
Next, subtract each source from its corresponding use to arrive at the net change in cash position over time.
If you follow these tips, you will be able to create a cash flow statement.