computer, cash flow
Keeping an up-to-date cash flow statement is pertinent in monitoring your business's earnings and expenses. — NicoElNino

A cash flow statement is an essential tool that lets you view and monitor your business’s financial activity. A well-organized statement allows you to assess your profit and loss, set a realistic budget, and stay organized when it comes time to file taxes.

What is cash flow?

Cash flow is essentially the amount of money coming into (inflow) and going out of (outflow) your business. Every amount earned or cost incurred plays a role in your cash flow and should be documented.

Within these broad categories of inflow and outflow are three main umbrellas that every line item on your cash flow statement will fall into.

Operating activities

Operating activities are ongoing expenses that cover your day-to-day operations, and will likely comprise the majority of your cash flow statement.

Examples of inflow operating activities include revenue, interest and dividends. Outflow operating activities consist of payroll, vendor payments, overhead costs, and taxes.

Investment activities

Investment activities refer to long-term payments needed to start and run your business. They usually account for larger chunks of your budget and may be one-time or ongoing.

Inflow investment activities include sales of business assets and payment from loans, while examples of investment outflow are equipment costs and loans made by the company.

Financing activities

Financing activities involve the money you’ve used to finance your business endeavors, and typically include transactions with creditors or funders. Inflow financing activities include borrowed money, while outflow involves debt service.

Every amount earned or cost incurred plays a role in your cash flow and should be documented.

Creating a cash flow statement

There are two methods of creating a cash flow statement that will enable you to seamlessly manage your finances going forward.

  • Direct method. The direct method tracks both inflows and outflows, then subtracts money spent from money received.
  • Indirect method. The indirect method starts with your business’s net income and factors in depreciation from there.

There are also several free online sources, including templates, available for use. Keeping your statement consistently up-to-date will project your cash flow and help you budget accordingly. The last thing you want is to lose track of your cash flow and not realize when you’ve dipped into negative territory.

Handling negative and positive cash flow

If you find yourself experiencing negative cash flow, don’t fret. An accurate cash flow statement will help you figure out the source of the issue and work on recovering.

There are a few different things you can do to quickly boost your cash flow when you’re short, including:

  • Applying for a loan or line of credit
  • Speeding up your collection process
  • Financing the purchase of equipment
  • Liquidating your assets
  • Delaying your payments to suppliers/vendors

However, it’s important not to make a habit of relying on these “quick-fix” methods. While each strategy can get you the money you need, there are financial (and reputational) costs involved, including increased interest rates or vendor fees.

On the other hand, if you find yourself with a surplus of cash, paying down debts will likely be your first move. Second to debt payoff is investing. According to CalcXML, if your after-tax ROI is greater than your after-tax cost of debt, you should probably invest - but not before evaluating your risks.

Sometimes, projecting your cash flow can feel like trial and error. Continuously reviewing your statements and taking the proper steps to prevent and recover from any shortcomings will help guarantee your business’s success.

CO— does not review or recommend products or services. For more information on choosing the best accounting software, visit our friends at business.com.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

Published March 14, 2019