Cash flow statement for small business
In this post we will discuss why you need a cash flow statement for small business and how to build one. You may remember, my last post about how small businesses can build a basic cash flow forecast and how to use those cash flow forecasts. A well-maintained cash flow forecast can help you predict what cash will come in and what will be paid out on a month-to-month basis. Businesses can use this insight to gauge how much cash will be available at the end of each month and whether they need to dip into savings or borrow funds.
How is a cash flow statement for small business different?
While the cash flow forecast looks forward, a cash flow statement looks at the cash that has already come in (over a quarter or year) and the cash that you’ve paid out. It’s one of the key financial statements that a business produces and is prepared along with your balance sheet and profit and loss (P&L) statement.
But isn’t that the same as a profit and loss statement?
Well, no. The P&L statement is prepared under the concept of accrual accounting. This requires businesses to record revenues and expenses as they occur, not when cash changes hands. This creates a problem because expenses reported on the P&L statement may not yet have been paid – which can create an inaccurate picture of a company’s cash posture.
This is where the cash flow statement comes in. This document shows how much cash your business has actually generated, and excludes the non-cash revenues and expenses that you’ve incurred.
Why do I need a cash flow statement?
A cash flow statement for small business is particularly important to investors seeking to determine the short-term viability of your company, particularly its ability to generate cash and pay bills.
Another benefit is that if your cash flow statement confirms that your business is consistently generating more cash than it spends, your ability to pay off debt, increase your dividend, or even acquire another business is enhanced.
What does the cash flow statement include?
Businesses generate cash in different ways and from different sources, so the cash flow statement is separated into the following three core elements:
Cash flows from operating activities such as customer collections and cash paid to vendors (compare this with your P&L statement and you’ll see the differences in timing between expenses and cash payments)
Cash flows from investment activities
Cash flows from financing activities
How do I prepare a cash flow statement?
I won’t get into the depths of how to prepare a cash flow statement (it’s too much to cover in one blog), but there are a number of overviews out there.
Cash flow statements can get complex, so it’s a good idea to talk to your accountant and get help with preparation and analysis of this important tool for assessing your cash situation.