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Cash Flow Statements, Explained

By Jennifer Dunn on January 15, 2019

One business school saying goes, “Revenue is vanity. Profit is sanity. Cash is reality.” It’s true. Cash is how you pay the bills. Cash is how you invest in new opportunities and grow your business.

You keep track of your business’s cash with a cash flow statement, which can help you answer questions like:

  • “Where did my money come from?”

  • “Where did my money go?”

  • “Can I cover upcoming expenses?”

  • “Can I afford to take advantage of new opportunities?”

As a business owner, your cash flow statement helps you make good decisions about operating your business. As your business grows, loan officers and potential investors will also ask to look at your cash flow statement to evaluate your business’s finances.

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The components of a cash flow statement

A typical cash flow statement looks like this: Cash Flow Statement Example A cash flow statement prepared using the indirect method.

Cash flow statements have three parts:

  1. Cash flow from operations This is the money coming into and leaving your business as a direct result of what your business does. Examples include payments from customers, payments to employees and vendors, and rent payments.

  2. Cash flow from investments This is the money coming into and leaving your business due to investment gains and losses. One example includes buying an asset, like a work truck or computer.

  3. Cash flow from financing This is the money coming into and leaving your business from external financing. Examples include taking out a loan from a bank, or any money gained when an owner or investor injects cash into a business. As your business grows, this might include paying investors or issuing stock.

In the above example, Diana evaluated her incoming and outgoing cash in all three categories, and ended the month with positive cash flow of $2,550,000.

How to prepare a cash flow statement

Before you begin preparing your cash flow statement, you’ll first need to gather all your company’s income and expenses. From there, you can create the cash flow statement yourself in a program like Excel, or have a Bench bookkeeper do it for you.

There are two ways to prepare a cash flow statement:

The indirect method (recommended for most businesses)

This is the simplest way to prepare a cash flow statement. With this method, you start with your net income from the period in which you want to evaluate your cash flow. To figure out your net income, first prepare an Income Statement and a Balance Sheet.

To see a more accurate representation of your company’s cash flow, you then adjust for incoming and outgoing cash through your business operations. Because this method is simpler, most small and medium-sized companies elect to use the indirect method of cash flow reporting for their own internal purposes.

The direct method

With this method, instead of starting with your company’s net income, you list out all of your cash income and expenses over the time period covered by the cash flow statement. Because this is more time consuming than simply adjusting your net income, most businesses elect to use the simpler indirect method. However, you may be required to present a cash flow statement prepared using the direct method when taking out a loan or pitching investors. You can learn more about preparing a cash flow statement using the direct method here.

A sample cash flow statement template

If you’re already doing your own bookkeeping, you can plug your info into a template like the one below.

Use a template like this to prepare your cash flow statement using the indirect method:

Cash Flow Statement Template

The bottom line

It’s important that you know how much cash is entering and leaving your business so you can make good decisions. This might include paring back spending when times are lean, or hiring a new employee when you have spare cash on hand. When you’ve mastered the ups and downs of your cash flow, then you’re in control of your business.

Don’t think you’re up to making your own cash flow statements? Try Bench. We’ll pair you with a dedicated bookkeeper to prepare cash flow statements for you, and simple software to keep tabs on your finances.

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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