What is a Cash Flow Statement and Components

CASH FLOW STATEMENT

The Cash Flow Statement is a tool used to show the movement or flow of cash into and out of a business. A business needs cash in order to pay rent, buy advertising, pay employees, pay for inventory, pay taxes, pay down business loans, pay for utilities, and so on. Without the necessary cash, a business will not survive.

A cashflow statement will provide an existing or a potential business with the following information;

    • How long will my company's cash last?
    • How much cash will the business have at the start of each month?
    • How much cash will my business have at the end of each month?
    • How much will be spent on business expenses each month?
    • How much money will my business need to operate each month?
    • How much cash will move into my business each month?
    • How much cash will be needed for interest & principal each month?
    • Will my business require any bank loans and, if so, when will they be needed?
    • and so on ...

In a nutshell, the Cash Flow Statement's purpose is to plan and control a businesses expected cash inflows and cash outflows in order to avoid unnecessary idle cash and unnecessary cash deficiencies.

Who Uses a Cash Flow Statement?
Existing business owners should use a cashflow statement to forecast their cash "needs" for the upcoming business year. In addition, existing businesses, planning on expanding their operation, will need to know how much cash is required for the expansion and when it will be required.

Aspiring entrepreneurs will need to develop cash flow statements to determine how much cash or financing they will need and when they will need it. Investors generally want to see the expected cash inflows and cash outflows of a proposed business venture for a three year period (ie. one cash flow statement each business year for three years).

Types of Cash Flow Statements:
A cash flow statement can be organized on a daily, weekly, monthly or quarterly bases. Whether you are currently in business or preparing the statement for a business plan, it is recommended that you use the monthly cash flow statement method. The monthly cash flow statement method shows the forecasted cash coming into your business and the forecasted cash going out of your business each month. Below illustrates an example of a monthly cashflow statement.

 

 
RED DEERE ELECTRONICS
FORECASTED CASH FLOW STATEMENT
FOR THE MONTH JANUARY 1 - JUNE 30, 200X
               
CASH INFLOWS: JAN. FEB. MAR. APR. MAY JUNE TOTAL
Sales from Customers (per month) $20,000 $15,000 $20,000 $10,000 $15,000 $12,600 $92,600
Loan from Family Member $ 5,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 5,000
From Government Grant $ 0 $ 0 $ 0 $ 0 $ 0 $ 2,000 $ 2,000
Cash at Beginning of Month $ 8,000 $ 8,250 $ 5,000 $ 5,750 $ 7,800 $ 8,900 $43,700
 
TOTAL CASH INFLOWS (A) $33,000 $23,250 $25,000 $15,750 $22,800 $23,500 $143,300
 
CASH OUTFLOWS:              
For Finished Product Purchases $ 0 $8,000 $7,000 $4,000 $2,500 $3,000 $24,500
For Promotions $9,000 $5,000 $6,000 $8,000 $5,000 $4,000 $37,000
For Office Salaries Expense $1,500 $1,500 $1,500 $1,500 $1,500 $1,500 $ 9,000
For Employer Costs (10% of Salary) $ 150 $ 150 $ 150 $ 150 $ 150 $ 150 $ 900
For Office Supplies $ 500 $ 0 $ 500 $ 0 $ 500 $ 0 $ 1,500
For Business Cards & Correspondence $ 200 $ 0 $ 0 $ 0 $ 0 $ 0 $ 200
For Telephone $ 200 $ 150 $ 150 $ 150 $ 150 $ 150 $ 950
For Business Registration & Fees $1,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 1,000
For Rent $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $ 6,000
For Utilities $ 300 $ 300 $ 300 $ 300 $ 300 $ 300 $ 1,800
For Credit Card Service $ 650 $ 400 $ 900 $ 900 $ 850 $ 700 $ 4,400
For Bank Charges $ 50 $ 50 $ 50 $ 50 $ 50 $ 50 $ 300
For Miscellaneous $ 200 $ 200 $ 200 $ 200 $ 200 $ 200 $ 1,200
For Income Taxes $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
For Withdraws $1,500 $1,500 $1,500 $1,500 $1,500 $1,500 $ 9,000
For Equipment Purchased $8,500 $ 0 $ 0 $ 0 $ 0 $ 0 $ 8,500
 
TOTAL CASH OUTFLOWS (B) $24,750 $18,250 $19,250 $17,750 $13,700 $12,550 $106,250
 
CASH EXCESS (Deficit) (A-B) $8,250 $5,000 $5,750 $-2,000 $9,100 $10,950  
 
FINANCING REQUIRED:
Bank Loan $ 0 $ 0 $ 0 $10,000 $ 0 $ 0  
Less Interest & Principal Payments on loan $ 0 $ 0 $ 0 $ 200 $ 200 $ 200  
 
NET FINANCING Effects (C) $ 0 $ 0 $ 0 $ 9,800 $ (200) $ (200)  
 
ENDING CASH BALANCE (A-B+C) $8,250 $5,000 $5,750 $ 7,800 $ 8,900 $10,750  

 


FORMAT OF A CASH FLOW STATEMENT:
Although many formats exist, most Cash Flow Statement consists of six main components:  Below provides a discussion on the format of a cash flow statement.

 
1.    The Heading
2.    Cash Inflows of a cash flow statement
3.    Cash Outflows of a cash flow statement
4.    Excess Cash (Deficiency)
5.    Financing Required
6.    Ending Cash Balance

 

For a complete illustration of prepare a cash flow statement from scratch, follow the link.  This example of a cash flow statement takes you through the process and discusses the required information needed to create and prepare a cash flow statement  (recommended read).

 

EXAMPLES OF CASH FLOW STATEMENT:

J&B Incorporated
Scholarship Information Services
The Internet Company
The Maple Syrup Company

Categories: Financial