Carefully and effectively managing your finances is something you need to get right as a business owner, as money coming into your company allows it to thrive and grow. On the other hand, if there is a lack of income and a lot of cash going out, this can cause serious problems and put your livelihood at risk.
One of the best ways to manage your business finances is by keeping detailed reports of every single corporate transaction. Not only will this help you when it comes to filing your taxes, but it’ll mean you can keep a close eye on how everything is going regarding your cash flow.
A cash flow statement is a recommended way of deciphering the financial health of your business. You need to understand exactly where you’re making a profit and what is draining your finances. By mastering your cash flow, you can gain insights into your business’s finances while ensuring that you’re not just making money, but also managing it in the best way possible.
Want to know more about how a cash flow statement can help you to do this? Read on to find out.
Cash Flow Statement: What Is It?
In simple terms, cash flow is money coming in and out of your business. Therefore, a cash flow statement is a report that gives an overview of all of these transactions during a specific period. It can also take into account the cash equivalents of certain things, if applicable. With this in mind, it’s a highly useful way to understand where your business is financially. This can help you assess liquidity while finding out how much cash is readily available.
Unlike an income statement, which includes non-cash items such as depreciation, a cash flow statement revolves around cash transactions. This can help you to assess where you stand and what may be around the corner. It can bring to your attention what’s working and what isn’t, by laying out all your information regarding investments, loans, invoices, and so on. This also allows you to figure out how much money you have to go towards all your expenses and how to budget accordingly.
What Does a Cash Flow Statement Include?
A cash flow statement is typically split into three main sections: operating activities, investing activities, and financing activities. Each of these parts provides insights into different aspects of your business’s financial transactions. Let’s explore them in more detail:
- Operating Activities
Your operating activities are linked to the daily running processes of your business that generate revenue. Therefore, this part of your cash flow statement looks at the money coming in and out of your business, relating to standard operations. This could include employee wages, stock payments, sales, and so on.
- Investing Activities
The investing activities section is about any of your investments, whether you’re purchasing or selling. For instance, the investments you buy could include machinery, property, or software for your business. Then, if you were to sell an investment, this would also be recorded in this section. Selling would count as cash inflow, whilst buying is cash outflow.
- Financing Activities
For financing activities, you would include transactions that are linked to the funding of your business. This could be cash inflows from loans, investors, and issuing stock, as well as cash outflows for repaying loans and dividends. If your business takes out a loan, this would feature as a cash inflow. Similarly, repayments of that loan would show up as cash outflows.
By understanding these three areas of your business cash flow, you can get a better idea of how you’re generating money as well as spending it. This understanding is important for managing finances as it means that you’re more likely to make better, more informed business decisions which can improve the chance of success.
How to Create Your Cash Flow Statement
Firstly, have a look at what is needed to build your report. A great place to start is getting to grips with the format of a cash flow statement – for example, there a are a number of free templates such as this one which are really handy. Then, you can start compiling all the data you need while categorizing it into the three sections that we covered: operating, investing and financing.
Using a pre-made template can save you a lot of time but if you want to create your own cash flow statement format from scratch, then this is a more detailed breakdown of how you can get started:
- Collect All Financial Data: You should already have your financial records in one place for ease, but if not, then start to gather all the relevant information that you need. Think about your income statements, balance sheets, and transaction records. This will allow you to pinpoint all the cash inflows and outflows in your business during the set period.
- Categorize by Activity: After you’ve got everything you need together, then it’s time to start organizing it into one of the three sections – operating, investing, or financing activity.
- Work Out Net Cash Flow: For each of these categories, you’ll need to subtract the total cash outflows from the total cash inflows to produce the net cash flow. A positive net cash flow suggests that your business is generating more cash than it’s spending, while a negative net cash flow means the opposite.
- Build the Cash Flow Statement: When you’ve finished calculating net cash flow for each part of the statement, it’s time to put what you’ve found into your cash flow statement. Once this is all in your document, the sum of these three sections will give you the net change in cash for the amount of time you’re looking at.
- Go Over the Results: Nearly finished! The last step is to read through and analyze the findings from your cash flow report. This can be eye-opening as it can show you where you’ve been impacted by seasonality, the economy, or other activities that may have impacted your finances. You should pay serious attention to this as it can tell you where your business is headed and how to improve things. Learn the up-and-down patterns of your cash flow to decipher what works best for your business.
With regular reviews of your cash flow statement, you can be proactive in making positive changes to your incoming and outgoing cash.
Ideas to Help Optimize Cash Flow
Even if your statement produces positive results, as a business owner, you always want to optimize your cash flow. This not only helps your business to last, but it encourages it to succeed.
There are plenty of ways you can improve your cash flow but one of the main things you need to consider is where costs could be cut. If you are spending too much on unnecessary items, try to reduce this. If you can find better value alternatives to something you spend money on often, then weigh up your options. Any savings you can make are beneficial in the long term, as long as it’s a cost that isn’t necessary. You could also consider money-saving options, such as software that can automate certain tasks and speed up processes internally.
Looking at it from the other way, with more of a focus on your income, consider where you can boost the money coming in. Is there a certain product you stock that does better than others? Consider extra promotion. Have you found a specific marketing tactic that works best? Invest more into this. Experiment a little. Try out different ideas to see what brings the most revenue back.
Try out these methods to save money and boost your income to improve your cash flow.
Common Cash Flow Mistakes to Avoid
When it comes to cash flow, there are also plenty of mistakes that business owners make. One of the main ones is being disorganized with finances, and not keeping proper records. This not only means you won’t be able to create an accurate cash flow statement to oversee your finances, but it can cause you trouble when it comes to filing your taxes. Try to ensure you have a good system in place. Consider the help of an accountant to guide you or look into accountancy software.
Spending too much money is also a very common issue. Try to always ensure you have an emergency fund saved, just in case you ever need it. This should cover 3-6 months of your business running costs, should anything ever go wrong, such as spending funds that you don’t have. However, don’t use your emergency fund as an excuse to overspend! It should only be there to use if you have no other option.
Leading on from this is making incorrect assumptions about how much you’ll make, as well as how little you’ll spend. Reviewing your cash flow statement should be able to give you more of an idea of this, but as mentioned, it’s always good to have savings in place in the form of an emergency fund to fall back on if the worst were to happen.
Conclusion
As a business entrepreneur, you need to understand your cash flow. To do that, being able to create and analyze your cash flow statement can make a massive difference to your finances, as it enables you to make strategic financial decisions going forward. By regularly checking and keeping up-to-date cash flow statements, you gain valuable insight into your business’s financial health.
