How to Prepare a Cash Flow Statement

A cash flow statement is an important financial document that you and others can use to understand your business. A cash flow statement provides details of the financial health of your organization, the amount of money you have on hand, and your capability to make repayments on financing. Learning how to create a cash flow statement is essential for presenting the financial facts about your business, like your net income, assets, liabilities, and investments. 

We’ll share the best approaches for preparing your statement of cash flows, so you’re showing everything in the correct way.

The Basics of the Cash Flow Statement

A cash flow statement will:

  • Report on the money generated and spent by your business over a specific time period.
  • Work with your income statement and balance sheet to provide information on the financial health of your business.
  • Show how well your business manages its cash, including generating revenue, making repayments, and funding operations and expansion.
  • Contain three main sections: Operating activities, investment activities, and financing activities. 
  • Provide insight into likely future income and financing needs for your business.

There are two main approaches for preparing a cash flow statement: 

  • The direct method relies on meticulous, accurate financial records, as it involves correctly calculating various income and expenditures your business has made. 
  • The indirect method typically takes figures from other financial reports and works backward from there.

This article will focus on the indirect method, as it tends to be used by the majority of small business owners. To complete your cash flow statement with this method, you’ll need to gather information from your other financial reports (more on this later!). 

Step One: Reporting on Cash Flows from Operating Income and Expenses

The first part of the cash flow statement discusses the operational income and expenses for your business. You’ll want to take the following areas into account. 

Net Income

Your net income figure comes from your business income statement. Your net income is typically:

  • Cash received from customers for selling goods and services;
  • Less cash paid to suppliers for inventory, goods, services, utilities, rent, and other operational costs;
  • Less other operational costs not captured above;
  • Less cash paid to employees as part of salary or payroll expenses.
Depreciation

In this section, you show the total depreciation of all fixed assets in your business.

Other Gains, Losses, Increases, or Decreases

You should also show other possible changes to your cash flow here, including:

  • Possible changes from accounts receivable or accounts payable.
  • Increases or decreases in trade receivables, inventories, or trade payables, from your balance sheet.
Cash Generated from Operations

This is the total cash your business has generated over the time period, which will be the combination of your net income, depreciation, and other gains, losses, increases, or decreases.

Showing Tax and Interest

There are many ways to report your cash flow. Some businesses choose to also show interest and taxes in this section—talk to your accountant about the best option for your business.

An Example of Cash Flow Operating Income and Expenses

Depreciation: $20,000
Accounts receivable: ($10,000)
Increase in inventory: ($35,000)
Accounts payable: ($12,000)
Cash generated: $323,000

Step Two: Reporting on Cash Flows from Investing Activities

The next part of your cash flow statement shows the investment gains or losses that your business has made. This section will typically include the purchase and sale of business assets. 

Purchase of Property, Plant, or Equipment (PP&E)

The money you have spent on buying long-term assets for your business. This might include office space or other property, vehicles, equipment, and any asset necessary for running the organization. This is also known as your “Capital Expenditure” (Cap Ex).

Sale of Property, Plant, or Equipment (PP&E)

If you have sold any long-term assets, you should list the income generated from such sales in this part of the cash flow statement.

Acquisitions or Sales of Other Businesses

Costs and proceeds from mergers and acquisitions are shown in this part of your cash flow statement.

Purchase or Sale of Marketable Securities

If your business invests in areas like stocks, bonds, or other securities, you would show these in the cash flow statement.

An Example of Investment Income and Expenses

Purchase of PP&E (Cap Ex): ($60,000)
Sale of property: $12,000
Purchase of securities: ($10,000)
Sale of securities: $5,000
Cash used by investment activities: ($53,000)

Step Three: Reporting on Cash Flows from Financing Activities

The last major part of your cash flow statement is your income and expenditures from financing. This includes receiving loans, making repayments on loans, company stock activities, and debt.

Borrowing of Long-Term Debt

Money that you have received from a loan or other financing arrangement that brings money into your business.

Repayment of Long-Term Debt

Money that you have paid back to a borrower during the cash flow period.

Issuing or Repayment of Equity

Money received from selling stock in the business, or money spent on repurchasing company stock.

Dividends Paid

Dividends that you pay to shareholders in the business.

Repayments of Capital or Financial Lease Obligations

Money that the business has spent on lease agreements.

An Example of Financing Income and Expenses

Borrowing of long-term debt: $25,000
Repayment of debt:  ($6,000)
Sale of company stock: $15,000
Dividends paid: ($5,000)
Cash received from financing: $29,000

Bringing Together Your Cash Flow Statement

Once you have gathered together information from across the three areas, you can combine them together into your cash flow statement. Here’s an example:

Cash Flow Operating Income and Expenses

Net income: $360,000
Depreciation: $20,000
Accounts receivable: ($10,000)
Increase in inventory: ($35,000)
Accounts payable:  ($12,000)
Cash generated:  $323,000

Investment Income and Expenses

Purchase of PP&E (Cap Ex): ($60,000)
Sale of property:  $12,000
Purchase of securities: ($10,000)
Sale of securities: $5,000
Cash used by investment activities: ($53,000)

Financing Income and Expenses

Repayment of debt: ($6,000)
Sale of company stock: $15,000
Dividends paid: ($5,000)
Cash received from financing: $29,000
Total cash flow:  $299,000

We hope that you’ve found this introduction in how to create a cash flow statement useful. If you’re ready to create your own and would like further guidance, check out this free template. In the meantime, keep in mind that there are numerous ways to prepare and show your cash flow. Use this information for general guidance, and consider reaching out to an accountant to ensure the cash flow statement for your business is correct.