A survey by  QuickBooks revealed that 60% of small businesses face problems with cash flow. Interestingly, to better understand whether your business is doing good or bad, you need to understand the cash flow statement and how to prepare one.

In this blog, I will discuss the importance of cash flow statement, how to prepare and calculate one for your business and towards the end I will share a few tips and the importance of cash flow management in business.

But first let’s quickly go through some basics.

What is Cash Flow?

The amount of money that comes in and leaves your business is called the cash flow. If the cash coming into your business is more than the cash going out, it is called a positive cash flow. But if the cash inflow is less than the cash outflow of the business, then it is called a negative cash flow.

Let’s assume you are a restaurant business owner, and in May you had a total revenue of $10000, and by the end of the month your total expenses were $8000. This leaves you with a profit of $2000. In this scenario, your restaurant business is in a positive cash flow state.

But, instead of $8000 if your business had incurred a total expense of $11000, you would be left with a deficit of - $1000, and this would be called a negative cash flow.

Why is that a big deal?

If your restaurant business is in a positive cash flow state, you are in a good position to launch a new marketing or sales campaign, re-invest surplus income to improve the restaurant ambience, and even invest in new kitchenware.

But if your restaurant business is in a negative cash flow state, chances are that you will struggle to launch a new marketing or sales campaign, invest in the restaurant ambience, expand ingredient inventory or buy kitchenware, and may face a lot of challenges in delivering services to your customers.

Now that you know what cash flow is, let’s move on to the next level – the importance of cash flow statement.

Why’s Statement of Cash Flow Important?

Let me illustrate an example where you are a small retail shop business owner who is reviewing the following statement.

It is very clear that your business made a profit of $200.

But now consider this, out of the $1000 worth of goods you sold, you have given a credit of $600 worth of goods to customers at zero percent interest rate. They enjoy a 60-day credit period, so you can’t expect them to make the payment earlier than that. This means you have only received $400.

On the other hand, you will have to credit salaries on time to your employees and make timely payment to the utility company.

Payment received ($400) - [ Employee salary ($200) + Utility payment ($100)] = $100

Now you are only left with $100 as profit.

But wait, there’s more, 6 months back, the wholesale vendor and you had an agreement that he would only ask for monthly payments after 6 months of credit period. So, from this month you must start clearing his due payment which is $500 every month.

Profit ($100) - Vendor payment ($500) = Cash Deficit (-$400)

This means you must now invest an extra $400 to keep your business afloat.

Based on the above details, your cash flow statement would look like this:

I think it is clear to you now that the cash flow statement (or statement of cash flows) is a statement that keeps track of:

• Cash Sources
• Cash Activities (i.e. operating, investing and financial activities)
• Transaction Period

I have listed operating, investing, and financial activities for your reference. Depending on the type of business and industry, it could have additional entries as well.

Thanks to a well-prepared cash flow statement you will always be on time

• In making payments to vendors
• In crediting employee salary
• In anticipating company expenses & challenges
• In spotting new business opportunities
• In hiring new team members
• In making strategic decisions

How to calculate a Cash Flow Statement? ...and make your life easy

The cash flow statement is calculated in two different ways – the direct and indirect method Direct method – is a very simple method and is often preferred by small businesses for this very reason. It involves subtracting the cash payable from the cash receivable on a weekly, monthly & quarterly basis. Here’s a cash flow statement example.

Pro Tip: “A Cash Flow statement, Chart of Accounts, and General Ledger go hand-in-hand and are crucial to prepare a robust statement of cash flow.”

Cash Flow Statement
Cash receipts from customers	$10000
Employee salaries	-$1500
Vendor payments	-$3000
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