Your cash flow statement, not to be confused with your cash flow forecast, is a vital tool in your business financial management arsenal.
What is Your Cash Flow Statement?
Whereas as your cash flow forecast looks forward to predict income and expenses so that you can plan ahead, the cash flow statement takes a look at what has already happened, i.e. the cash that has entered (whether from sales, interest, dividends, and other cash receipts) and exited your business.
By comparing your opening balance with your closing balance, you can see how much cash your business has generated and how it’s moving in and out of our business.
How Does It Differ From Your P&L Statement?
Sounds a lot like a profit and loss (P&L) statement right? Not quite. Your P&L statement records revenues and expenses as they occur, usually over the period of a month (income – expenses = net profit). Taken alone, this data can muddy your view of your finances because it shows the revenues earned, not paid, during a particular period.
For example, if you make a sale of $10,000 in one month, but don’t get paid for 90 days, then you’ve logged your revenue and costs before any cash has changed hands. While you appear to have made a profit, your cash position is nowhere near as strong as your P&L statement may suggest.
That’s why it’s critical that you don’t confuse profits with cash flow.
Tip: It’s critical that you maintain both a cash flow statement and a P&L statement because cash flow and profitability are two separate indicators. If your business shows a profit but maintains a weak cash position, these two statements will give an insight as to why.
Why a Cash Flow Statement Can Help You Stay in the Black
The cash flow statement is particularly helpful in determining your cash flow position. If you’re generating more cash than you spend, you can consider your business to be cash flow-positive. However, if your expenses exceed your income, or the timing of each is off (i.e. you’re paying bills before you have the cash in hand to cover them) and you’re doing this consistently, then you have a problem.
Furthermore, if you’re seeking investment such as a bank loan, your lender will also look to your cash flow statement (alongside your forecast) to assess the viability of your business and its ability to pay off debt.
Another benefit of your cash flow statement is that it informs your cash flow forecast. If you have an accurate picture of when you were getting paid in the past and when your expenses hit, you can more easily forecast what the future looks like and act now to mitigate any future cash flow problems. At the end of the day, the cash flow statement also reveals the success of those forecasting activities.
How to Create Your Cash Flow Statement
You have several options for building your cash flow statement:
Use your accounting software
Quickbooks, Xero, FreshBooks, etc. all include built-in cash flow statements. It’s a good idea to work with your accountant to customize it to your needs. The great thing about doing it this way is that you get dashboard insight into your data, plus you can easily share your statement and other financial documents with your accountant right within the software.
Work with a template
Either create your own template showing cash in and out or do a quick search online. If not, ask your accountant to provide you with a user-friendly template. Organizations like SCORE and your local Small Business Development Center often run free classes on how to prepare key financial statements too.
Work with a professional
Because of the importance of the cash flow statement (see reasons above), it’s worth consulting a pro to help you get started so you have a clear idea of what to track as well as when and how to analyze your data.
Don’t neglect your cash flow statement, maintaining and reviewing it regularly will help you better grasp your fiscal health, plan for the future, and get the right kind of financing should you need it.