How to Write a Cash Flow Statement

Managing your business finances effectively requires keeping a close eye on the money flowing in and out of your business.

A cash flow statement is a crucial tool that provides a snapshot of your financial health by showing how cash moves in and out of your business over a specific period.

Why a Cash Flow Statement Matters

A cash flow statement helps you:

• Track the liquidity of your business, ensuring you have enough cash to cover your obligations.
• Identify trends in cash flow, enabling better financial planning and decision-making.
• Spot potential cash shortfalls before they become a problem.

Four Simple Steps to Create a Cash Flow Statement

Creating a cash flow statement doesn’t have to be complicated. Follow these four steps:

1. Start with the Opening Balance

• Begin with the total cash your business has at the start of the period. This is your opening balance.
• For example, if your business had ₦500,000 in the bank at the start of the month, this is your opening balance.

2. Calculate Cash Inflows (Sources of Cash)

• List all the cash you expect to receive during the period. This includes:
  • Sales Revenue: Cash received from sales of goods or services.
  • Accounts Receivable: Collections on past sales made on credit.
  • Loans and Investments: Any loans received or personal investments made in the business.
• Example: If you expect to receive ₦200,000 from sales and ₦50,000 from a loan, your total inflow is ₦250,000.
• Formula:$$\text{Total Cash Inflows}=\text{Sales Revenue}+\text{Accounts Receivable}+\text{Loans and Investments}$$
• Add this to your opening balance to get the total cash available for the period.

3. Determine Cash Outflows (Uses of Cash)

• List all the payments you expect to make during the period. This includes:
  • Operating Expenses: Rent, salaries, utilities, inventory, etc.
  • Loan Payments: Any repayments made on business loans.
  • Taxes: Payments made for tax obligations.
• Example: If your rent is ₦100,000, salaries are ₦150,000, and utilities are ₦30,000, your total outflows would be ₦280,000.
• Formula:$$\text{Total Cash Outflows}=\text{Operating Expenses }+\text{Loan Payments }+\text{Taxes}$$
• Subtract your total outflows from the cash available to determine your closing balance.

4. Calculate the Closing Balance

• Subtract the total cash outflows from the total cash available. This gives you the closing balance.
• Example: If your total cash available is ₦750,000 and your outflows are ₦280,000, your closing balance is ₦470,000.
• This closing balance becomes your opening balance for the next period.

Alternative Method: Categorizing Cash Flows

For a more detailed analysis, you can categorize cash flows into three activities:

1. Operating Activities: Cash flows from day-to-day operations.
2. Investing Activities: Cash flows from investments, such as buying or selling equipment.
3. Financing Activities: Cash flows from financing, including loans and investments from owners.

Utilizing Your Cash Flow Statement

The primary benefit of a cash flow statement is its ability to help you manage your business’s liquidity. By analyzing your cash flow:

• Identify Periods of Shortfall: Recognize when you may not have enough cash to cover expenses and take action, such as securing a loan or cutting costs.
• Make Informed Decisions: Use the data to plan for future expenses and investments, ensuring your business remains solvent and can capitalize on growth opportunities.

Conclusion

A well-prepared cash flow statement is vital for understanding the financial health of your business.

By following these steps, you can create a clear and accurate cash flow statement that will help you manage your cash effectively and make informed decisions to grow your business.