You have made your balance sheet and income statement. Now can you finally determine the overall financial condition of your business? No. There are other statements or reports to make including cash flow statements.

Statement of Cash Flows Definition

More formally called statement of cash flows, the cash flow statements are reports that identify the movements of your cash, which is an essential part of your business operations, over a certain period of time (e.g., 3 months, 6 months, or 1 calendar year). Cash accounts decrease or increase every time you buy an equipment, pay or get a loan, boost your capital, pay your expenses, and other business-related transactions. Because of its role, this statement is mandatory.

A cash flow statement also adheres to the matching principle. This is to ensure accountants, auditors, and anyone concerned truly understand the relationship between your expenses and revenues.

Reasons for Creating a Cash Flow Statement

One, financial institutions such as banks are interested to know the health of your business before they provide you with the loan. After all, they want an assurance that you can pay your dues (principal plus interest) at the right time.

Second, the report tells you a lot about liquidity or how easy it is for you to use cash. You see, just because you have a very high net income doesn’t mean your business is healthy. In fact, it makes others, especially investors, question: What are you exactly doing with your money? Why isn’t it moving?

Third and as mentioned, it is mandatory. For more details see monthly acounting

Fourth, you can use the same concept in generating your personal cash flow statement. Besides knowing your net worth, you will have a clearer picture where your money is coming from, what items are draining it, and how you are exactly spending it.

Cash Flow Statement Example and Template

The main goal of cash flow statements is to show the movements of cash (going in or out) and its equivalents such as receivables. A cash flow statement therefore is made up of activities: operating, investing, and financing. If some business transactions do not necessarily involve cash but have some impact on any of the mentioned activities, you can disclose them in text.

Operating activities are those that involve cash on the daily operations of your business, such as accounts receivables, expenses, and payments of accounts payables. Investing activities, meanwhile, are the purchase and sale of non-current assets such as your equipment and/or land. Financing activities are the repayments and borrow of additional capital, equity, and dividends.

As a business owner, you have the option to delegate the creation of the cash flow statement to an accountant, who you can outsource. However, you also need to understand the figures you see yourself since in the end you are the one who is going to make some business decisions.

Use the power of the Internet to look for great examples of a cash flow statement. There are also some free e-books available that show a step-by-step process.