Staying cash flow positive is critical to your business' success, but it's not always easy.
Many external factors affect sales and revenues. However, there are various ways to keep cash flowing. Strategies include collecting on late payments, correctly pricing products and services, avoiding excess stock and reducing overheads, for example.
To take control of your finances, the first thing you need to do is to understand how much cash is coming in and going out. You also need to know how much money you have on-hand at any given point in time. This is where a cash flow statement comes in.
What is a cash flow statement?
A cash flow statement is a document, typically generated monthly, quarterly, and/or annually, showing how much cash a business has on hand at a given moment in time. Moreover, a cash flow statement shows specifically where your spent cash has gone, and where your incoming cash is coming from.
Note that we’re talking about actual cash exchanges and cash on-hand, here. Your cash flow statement is only concerned with financial transactions in which actual money changes hands.
By preparing this statement of cash flows, you’ll gain a better idea of your business’ current financial situation — and will also be better able to predict your financial future, as well.
What’s included in a cash flow statement?
A cash flow statement includes 3 types of cash-related transactions:
operating activities
investing activities
financing activities.
Let’s take a closer look at each of these.
Cash flow from operating activities
Operating cash flow (OCF) refers to cash generated or spent through a company’s typical business operations.
Looking at incoming cash flow, operating activities include cash coming from sales, interest payments, and dividends. Outgoing operating activities include cost of goods sold (COGS), as well as payments made to employees and suppliers, and on any taxes due.
Your operating cash flow is perhaps the most vital piece of the puzzle, as it shows whether your business is able to bring in more money than it pays out through normal operations. If your operating cash flow isn’t steadily improving over time, it may be a sign that your business is unsustainable.
In any case, understanding your operating cash flow will allow you to make laser-focused improvements to your internal processes, your approach to pricing, and much more. Over time, you’ll be generating more cash — and will be spending a lot less to make it happen.
Cash flow from investing activities
Cash flow generated or spent on non-current assets is considered cash flow from investing activities (CFI).
Incoming cash flow from investing includes payments made to your company from loans, cash received from the sale of assets, and funds received from market security maturation. Examples of outgoing CFI include payments made on property, equipment, and other business acquisitions.
It’s not uncommon for small, growing businesses to have a negative CFI. As the old saying goes, you’ve got to spend money to make money — and it may take some time for your investments to start paying off.
That said, once a business achieves profitability, it should become a bit easier to maintain a positive CFI while also increasing their spend on growth.
Cash flow from financing activities
Cash flow from financing (CFF) shows cash raised or spent for the purpose of funding the company.
As such, it involves cash-based transactions revolving around debt, dividends, and equity. CFF considers cash incoming from loans and stock issues, along with outgoing payments on dividends and outstanding loans.
Typically, CFF is used to assess the financial strength and structure of the company — in turn providing investors with insight into the business’ stability and growth.
Because of this, context is crucial when analysing cash flow from financing activities. A positive cash flow gained, for example, by repurchasing stocks during a downturn isn’t necessarily a good thing — and may make investors quite skeptical.
On the other hand, a negative CFF can be a sign of overwhelming debt — or it may simply be due to the company paying off debts early and in full.
Cash flow vs. other financial statements
A cash flow statement is one of four financial statements that provide insight into a company’s financial health and activities over the reporting period. The other financial statements are the profit and loss statement, balance sheet and the statement of retained earnings.
It’s particularly useful to view the cash flow statement alongside the profit and loss statement and balance sheet.
Cash flow statement vs. profit and loss statement
While there is some overlap between a cash flow statement and a Profit and Loss (P&L) report, they're two separate documents — and should be treated as such.
Conflating your cash flow and your P&L numbers can potentially give you the wrong impression of your company’s financial situation.
The main difference between the two:
A cash flow statement shows how much cash the company has on hand at the end of the period, while a profit & loss statement shows how much revenue was generated in that same time period — even if the actual cash is yet to be collected.
For example, while sales made with net terms attached are shown in full on a P&L statement, only the cash that’s been collected thus far would be shown on a cash flow statement for the same time period.
Both documents differ in how they’re used, as well. While a P&L statement is helpful for assessing a business’ performance over the long-term, cash flow statements assess the company’s ability to support and sustain this performance over time.
Because of this, both documents should be used in conjunction with one another to get a true grasp on your company’s financial status on a macro and micro scale.
Cash flow statement vs. balance sheet
While your cash flow statement shows where your cash is coming from and going to, a balance sheet presents a business’ assets (what’s owned), liabilities (what’s owed) and shareholder equity for the reporting period.
A balance sheet should balance out. Total assets should equal total liabilities plus shareholders’ equity. This is because everything the business owns must be funded by either borrowing money or receiving it from shareholders.
Investors compare a company’s balance sheet with previous reporting periods to assess a company’s financial wellbeing. They’ll also view the balance sheet alongside the other financial statements to get a more complete picture of a business’ financial health.
Why do you need cash flow statements?
We already discussed the “big picture” reason why you need cash flow statements:
Without an accurate and comprehensive handle on your cash flow situation, your business is essentially always at risk.
Staying on top of your cash flow, on the other hand, is helpful in a number of ways.
Understand your level of liquidity
For starters, a cash flow statement tells you how much liquidity you have available at a given moment.
Keeping track of your cash on-hand is crucial for maintaining operations and keeping your business moving in the right direction. Without an understanding of how much you have in your coffers, running out of cash will always be a distinct possibility.
Understand your asset, liability and equity positions
Used in conjunction with a balance sheet, a cash flow statement can help owners understand their overall equity status.
Analysed over time, your cash flow statements and other financial records will show how your assets, liabilities, and equity have fluctuated over time. This gives you a clearer understanding of your business’ performance during that time period — and enables you to identify when things aren’t going as well as they’d seemed.
Predict future cash flow
The better you understand where your cash comes from and goes to, the more able you’ll be to predict how this will all go down in the future.
This, again, is why assessing cash flow in context is so important:
By assessing the necessary variables in relation to one another, you’ll understand how a change in one area will lead to changes elsewhere. From there, you can make more informed and strategic financial decisions as you continue striving toward growth.
Cash flow statement limitations
As we’ve touched on, your final cash flow numbers should never be taken at face value. In many cases, a negative cash flow isn’t necessarily a cause for concern.
Fledgling owners, for example, may need to spend a ton of capital to get their business up and running — and likely won’t hit their break-even point for some time. Paying off purchases in full will also decrease your cash flow — but the newly-acquired assets can make this decrease worthwhile.
That said, an unplanned or unexpected cash flow is almost always a sign that something is wrong. But, if you’re meeting your projections regarding cash flow and overall business performance, sporadic negative cash flow is no reason to panic.
A positive cash flow doesn’t necessarily mean business is all of a sudden booming, either. For example, the increase may be due to credited purchases that have already been accounted for, but are only now being realised. Taking out a loan can also cause your cash flow to spike.
With that in mind, you’ll always want to look past the actual dollar amount shown — and to focus more on how this number came to be.
How to prepare a cash flow statement
Now that we have a better idea of what a cash flow statement is, what it involves, and why it’s important, let’s walk through the process of actually creating one.
1. Gather your financial documents and data
In order to nail down your cash flow for a given time period, you’ll need to consult your other financial records.
This includes:
balance sheets, documenting the amount of debt you owe, along with the value of your assets and your overall business
Profit & Loss statements showing your revenues and expenses throughout the time period
past cash flow statements for the purpose of contextual analysis statement of changes in equity to connect the information presented in the above documents
material transaction records and artefacts as evidence of the cash transactions that took place over the time period.
This preliminary step is necessary to ensure you don't overlook any important information that could impact your understanding of your cash flow.
2. Identify your opening cash balance
Once you’ve collected all of the above information, you simply need to identify how much cash you had on-hand at the start of the period.
3. List incoming cash
Make a list of all incoming cash transactions, including the amount collected, and the source of the funds.
4. Calculate your total incoming cash amount
Add up the total of all incoming cash transactions.
5. List outgoing cash
Then, list every outgoing cash payment you made over the time period.
Again, include both the amount and the recipient of the payment.
6. Calculate your total outgoing cash amount
Add up the amount of cash you paid out throughout the period.
7. Adjust for non-cash items
While your balance sheet will include non-cash transactions (such as depreciation and amortization), it’s important to factor these events out of your cash flow statement.
(Otherwise, it may look like you have more cash available than you actually do — which can cause major problems for your business.)
8. Calculate your cash flow
Subtract your total outgoing cash amount from the total amount of incoming cash to find your cash flow amount for the time period.
Cash flow = (Cash received) - (Cash paid out)
This will tell you how much actual cash you gained or lost over the timespan.
9. Calculate your closing cash balance
Finally, calculate your closing cash balance using the following formula:
(Starting cash balance) + (Cash flow for time period)
If your preparations and calculations were correct, the number you come up with should be the total amount of cash you have on-hand.
How to generate a cash flow statement in MYOB
In MYOB Business, cash transactions are classified by the category they’re coded to. To change the classification of a category:
Go to the Accounting menu and choose Categories (Chart of accounts).
Click the category you want to change.
In the Classification for statement of cash flows field, choose the required classification. If unsure, check with your accounting advisor.
Click Save.
To run the cash flow report:
From your Dashboard click Reporting then Reports.
Under the Banking reports section, click Statement of cash flow.
At the top, select your report settings: Date range — Choose from the pre-determined date ranges or choose a custom date to run the report at.
Click Report options to see more customisation options and filters including: year-end adjustments, display negative amounts and display cents and currency symbols.
Click Customise to reorder the columns by dragging and dropping them.
Review the report. Click the drop-down next to the classification headings to see which categories make up the amounts. Figures that are hyperlinked in purple can be clicked to see a breakdown of transactions that make up the category amount.
Click 'Save as' to save as a custom report or click 'Export' to export to PDF or excel.
Use this interactive demo to see how to generate a cash flow statement in MYOB.
Improve your cash flow management with MYOB
Managing your cash flow is one of the most important things you can do to keep your business headed in the right direction.
Thankfully, MYOB’s accounting software includes tools and features specifically meant to help improve your cash flow management processes. With automated reporting, our software ensures you'll be able to stay on top of your cash flow at all times. You can also invite your accountant to access your MYOB software at no additional costs, so you get the support you need. Ready to get started? Check out our plans and pricing.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.