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What Is a Statement of Cash Flows and How to Create and Analyze It
By Giuseppe Michienzi, TD In-Store Small Business Lead
Monté Foster, TD SVP, Retail and Small Business Banking
What is a statement of cash flows?
A cash flow statement is a financial statement that summarizes the amount of cash flowing into and out of a company. This includes all cash inflows a company receives from its ongoing operations and external investment sources. It also includes all cash outflows that pay for business activities and investments during a given period. This is usually done monthly, quarterly and/or annually depending on how the owner wants their books done.
Why should I create a statement of cash flows for my business?
Often, a business owner will create a statement of cash flow in response to a need for financing, new working capital, acquiring or partnering with a business or selling the business. There are three cash flow statements that can help a lending organization get a good picture of your finances and cash flow which will help them process your loan application.
The 3 cash flow statements: operating, investing and financing
Each of these statements are related, but separate and unique statements that help a business owner or anyone understand the cash flowing into and out of a business. You should create each of these three cash flow statements as its own separate category on a cashflow statement. Numbers may be positive (your business made money over the time period) or negative (your business lost money over the time period). Once complete, you'll have a better picture of how your business is performing and what areas you may need to improve on.
Your business might not have or need all three versions of a cash flow statement. For example, if you don't have any investments or financing/debt obligations, you might just have an operating cash flow statement. Typically, a business engaged in providing goods and services will at least have an operating cash flow statement.
Operating cash flow statement
Shows the amount of money a company brings in from its ongoing, regular business activities such as selling goods, manufacturing or providing a service to customers.
Investing cash flow statement
Shows the cash generated or spent relating to investment activities. Investing activities include purchases of physical assets, investments in securities or the sale of securities or assets. Add up any money received from the sale of assets, paying back loans or the sale of stocks and bonds. Subtract money paid out to buy assets, make loans or buy stocks and bonds. The total gets reported on your cash flow statement.
Some examples of investing cash flows are payments for the purchase of land, buildings, equipment, and other investment assets and cash receipts from the sale of land, buildings, equipment, and other investment assets.
Financing cash flow statement
Shows the net flows of cash that are used to fund a company. Financing activities include transactions involving debt equity, and dividends. An example of financing cash flows include cash proceeds from issuance of debt such as notes or bonds payable, cash proceeds from capital stock, cash payments for dividend distributions, principal repayment or redemption of notes or bonds payable, or purchase of treasury stock. Cash flows related to changes in equity can be found on the statement of stockholder’s equity, and cash flows related to long-term liabilities can be found on the balance sheet.
How to prepare a cash flow statement
Our cash flow forecast template (available in PDF and Excel formats for download) will help you detail the cash coming into and going out of your business on a monthly basis so you can forecast future surpluses and shortfalls. This is a valuable measure of strength, profitably, and the long-term outlook of your company. It can also help determine whether your company has enough cash and liquidity to pay for expenses.
How to use the cash flow forecast template
Use these descriptions to help you complete the template. Enter only the costs relevant to your business.
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Template entry |
Description |
|---|---|
|
Receipts |
This includes the cash flow from all revenue-producing activities:
Tips: Use accurate figures from the past for accuracy in forecasting. Make sure you're taking into consideration seasonality – look for industry benchmarks and trends related to your market area that can impact revenue. Also, leave room for credit sales and late payers. For example:
|
|
Direct costs |
Costs that can be directly tied to the production of specific goods or services. Can include variable costs that are associated with production levels such as inventory. |
|
Overheads |
All fixed or variable expenses required for the operation of a business. Include only expenses relevant to your business. |
|
Total cash payments |
The total sum of all the money that is moving in and out of your business. The template calculates this for you based on your entries. You can also find this number by subtracting costs from receipts/revenue. |
|
Net cash flow |
Simply put the net amount of cash flowing in and out of your business. (revenue minus expenses and capital investment = net cash flow) |
|
Opening bank balance |
The amount of cash at the beginning of the month/period. Check your bank balance at the beginning of the period to get this number. |
|
Closing bank balance |
The amount of cash at the end of the month/period. Check your bank balance at the end of the period to get this number. |
How to read a statement of cash flows
One of the biggest benefits of completing a statement of cash flows is to determine your current amount of cash and/or the increase or decrease in cash over a specific time period. We recommend monthly or quarterly reporting depending on your business, with results broken down in three different ways:
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Cash at beginning of period: The amount of cash your company has at the start of the fiscal period. This is equal to the ending cash balance from the previous fiscal period.
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Cash at end of period: The amount of cash your company has at the end of the current fiscal period.
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Change in cash: The amount by which your company's cash balance increases or decreases in an accounting period. To determine change in cash, simply find the difference in cash from your previous period to the current one.
Analysis: What can a cash flow statement tell you?
Looking back – compare month over month (MoM) and then year over year (YoY):
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When is there a cash flow surplus?
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What do you do with excess cash when you have it?
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When do you have a cash flow shortfall?
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What happens during a shortfall?
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How are current growth plans performing?
Looking ahead – at least 1-5 years:
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Plan for upcoming sales seasons: Cash flow statements can help you identify busy or slow seasons and plan for them accordingly, especially when it comes to your financial health during certain parts of the year
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Consider "What if?' scenarios: What happens if another pandemic or disaster were to occur? Would your business be able to handle that? For how long? How much of a drop in revenue can you handle?
As you create your business cash flow statements, be sure you understand how you came to all your calculations. And remember, honesty is the best policy when creating financial documents for your business.
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