Tax & Business Services |
Cash Flow and the Cash Flow Statement
Your small business may have a great looking income statement and balance sheet, but if you don't have any cash in the bank to pay bills, it won't be long before your business is in trouble.
You'll want to know the status of your cash on a weekly basis at least, if not every day. Cash is different from profit, in that its only function is to sit in the bank as a "buffer" to pay payroll, insurance and more. You may not make a profit for many months while you build a customer base, and you'll need the cash to run the daily business.
Cash flows in. Cash flows out.
As you get money from customers, the cash comes in. And as you pay your bills, the cash flows out. Balancing this yin and yang so that you don't have a negative balance in your bank account is more of a management skill than an art. By knowing when you need to collect bills from customers and when you need to pay the bills due, you'll be aware of your cash needs.
Projections
You'll need to make tough choices on where and when to spend your small business's cash. For example, you may not want to use cash to buy inventory if customers aren't paying on time. By developing a cash flow projection for the short term (weekly) and long term (annually), you'll be more aware of your cash needs and able to plan accordingly.
The statement of cash flow
There are three types of cash: operations, investing and financing. Knowing what type of cash you have will help you manage cash more effectively. On the cash flow statement, divide cash by:
On the statement, you may want to identify decreases by putting brackets around them. Then total the amounts to show the increase or decrease in cash at the end of a time period. In an annual cash flow statement, the net amount should be the same as the cash amount on the balance sheet.
Example:
Your small business may have a great looking income statement and balance sheet, but if you don't have any cash in the bank to pay bills, it won't be long before your business is in trouble.
You'll want to know the status of your cash on a weekly basis at least, if not every day. Cash is different from profit, in that its only function is to sit in the bank as a "buffer" to pay payroll, insurance and more. You may not make a profit for many months while you build a customer base, and you'll need the cash to run the daily business.
Cash flows in. Cash flows out.
As you get money from customers, the cash comes in. And as you pay your bills, the cash flows out. Balancing this yin and yang so that you don't have a negative balance in your bank account is more of a management skill than an art. By knowing when you need to collect bills from customers and when you need to pay the bills due, you'll be aware of your cash needs.
Projections
You'll need to make tough choices on where and when to spend your small business's cash. For example, you may not want to use cash to buy inventory if customers aren't paying on time. By developing a cash flow projection for the short term (weekly) and long term (annually), you'll be more aware of your cash needs and able to plan accordingly.
The statement of cash flow
There are three types of cash: operations, investing and financing. Knowing what type of cash you have will help you manage cash more effectively. On the cash flow statement, divide cash by:
- Operations cash from the sales of products and services
- Investing cash from non-operations activity and assets, such as investments in equipment
- Financing cash from lenders, investors and shareholders
On the statement, you may want to identify decreases by putting brackets around them. Then total the amounts to show the increase or decrease in cash at the end of a time period. In an annual cash flow statement, the net amount should be the same as the cash amount on the balance sheet.
Example:
| Operations Cash: | $X |
| Investing Cash: | [$Y] |
| Financing Cash: | [$Z] |
| Net equals: | $X - $Y - $Z |