Create a Cash Flow Statement
Lets examine how you can protect your business from the dreaded cash crunch. A cash flow statement clearly documents the movement of cash in (working capital) and out of your company during an accounting period.
To get started, make sure you:
- Have record of our all of your expenses during an accounting period
- Have record of all revenue that comes into the business for the same accounting period
- Have an income and balance sheet for the same accounting period
Take Your Pick
There are generally two methods for calculating cash flow from operating activities: indirect and direct.
Indirect:
Because of its relative simplicity, the indirect method has you start with a figure for net income (from your income statement). The net income is then adjusted to take into account changes during a specific accounting period. Adjustments are made to reflect depreciation and amortization, accounts receivable, inventory accounts payable, accrued wages payable, prepaid insurance and income taxes payable.
Sample Cash Flow from Operating Activities (Indirect Method)
| Net Income | | | 30,000 |
| Adjustments: | | |
| | Depreciation and amortization | 10,000 |
| | Deferred Taxes | 1,500 |
| | Decrease in accounts receivable | 9,000 |
| | Increase in inventories | (8,000) |
| | Increase in accounts payable | 1,000 |
| | Net cash flow from operating activities | |
Use the following chart to figure out cash flow via the indirect method:
The information provided by this workshop is intended for informational purposes only and accuracy is not guaranteed. Bank of America and its affiliates are not marketing, legal, financial or business advisors. This workshop is not intended to offer specific marketing, legal, financial or business advice. Bank of America realizes that each Small Business is unique, please consult with qualified professionals to discuss your situation.
Direct Method:
The direct method, although less popular, is favored by many financial managers because it reports the source of cash inflows and outflows directly, without the potentially confusing adjustments to net income.
Instead of starting with a reported net income, the direct method analyzes the various types of operating activities and calculates the total cash flow created by each one. Before beginning the direct method, all accrual accounts must first be converted to a cash figure.
Use the following chart to figure out cash flow via the direct method:
The information provided by this workshop is intended for informational purposes only and accuracy is not guaranteed. Bank of America and its affiliates are not marketing, legal, financial or business advisors. This workshop is not intended to offer specific marketing, legal, financial or business advice. Bank of America realizes that each Small Business is unique, please consult with qualified professionals to discuss your situation.
Cash Flow Statements are broken down into three sections:
Operating activities
Operating activities (all transactions and events that normally enter into the determination of operating income) include cash receipts from selling goods or providing services, as well as income from items such as interest and dividends.
Operating activities also include your cash payments such as inventory, payroll, taxes, interest, utilities, and rent.
The net amount of cash provided (or used) by operating activities is the key figure on a statement of cash flows. Cash receipts include:
- Sale of goods or services
- Interest revenue
- Dividend revenue
- Cash payments include:
- Inventory purchases
- Payroll
- Taxes Interest expense
- Other (utilities, rent, etc.)
Note: While cash inflows from interest or dividends could be considered investing or financing activities, the FASB classifies them as operating activities (which means you should too!).
Investing activities
Investing activities include transactions and events involving the purchase and sale of securities (excluding cash equivalents), land, buildings, equipment, and other assets not generally held for resale.
It also covers the making and collecting of loans. Investing activities are not classified as operating activities because they have an indirect relationship to the central, ongoing operation of your business (usually the sale of goods or services).
Cash receipts include:
- Sale of plant assets
- Sale of a business segment
- Sale of investments in equity securities of other entities or debt securities (other than cash equivalents)
- Collection of principal on loans made to other entities
- Cash payments include:
- Purchase of plant assets
- Purchase of equity securities of other entities or debt securities (other than cash equivalents)
- Loans to other entities
Financing activities
All financing activities deal with the flow of cash to or from the business owners (equity financing) and creditors (debt financing).
For example, cash proceeds from issuing capital stock or bonds would be classified under financing activities.
Likewise, payments to repurchase stock (treasury stock) or to retire bonds and the payment of dividends are financing activities as well.
Cash receipts include:
- Issuance of own stock
- Borrowing (bonds, notes, mortgages, etc.)
- Cash payments include:
- Dividends to stockholders
- Repaying principal amounts borrowed
- Repurchasing business' own stock (treasury stock)
Formatting Your Cash Flow Statement
The Investing and Financing Activities sections of the statement of cash flows are straightforward. The Operating Activities section, however, is more complex and requires analysis of operating accounts that converts figures from an accrual to a cash format.
The following is the general format for a statement of cash flows:
 | | | | | | | Cash provided (or used) by: | | |
|
| Operating activities | $XXX |
| Investing activities | $XXX |
| Financing activities | $XXX |
| Net increase (decrease) in cash and cash equivalents | $XXX |
| Cash and cash equivalents at beginning of year | $XXX |
| Cash and cash equivalents at end of year | $XXX |
|
There are two methods that are used in calculating and reporting the amount of net cash flow from
operating activities: the indirect method and the direct method. Although both produce identical results,
the indirect method is used more often because it reconciles the difference between net income and the net
cash flow provided by operations.
Resources/Help: Businesses looking for help with their cash flow statements can tap into the following resources:
Financial Institutions: Visit your bank - preferably before your cash flow gets out of control - for assistance with a line of credit, accounts receivable loan or other vehicle to ease the cash crunch.
Accounting and Financial Professionals: A quick review on your financial statements by a trained eye can help detect slow collections, poor financial management, overextended accounts payables or other warning signs.
Financial Institutions: Visit your bank - preferably before the cash flow management gets out of control - for assistance with a line of credit, accounts receivable loan or other vehicle to ease the cash crunch
Business Groups: Groups like the U.S. Small Business Administration (SBA), the Service Corps of Retired Executives (SCORE) and state-specific groups like the Minority Business Development Councils (MBDCs) offer programs and guidance for small business owners with financial questions. (Alexander, for example, gained insights from his local SCORE office, on how to generate cash by holding publishing-related seminars.)
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