A little while ago, we wrote a blog talking about how to identify cash flow issues within your business. That blog has got a lot of responses, with a lot of people asking us how they measure their cash flow in the first place. This is a good question, and it’s an essential tool if you want to make sure your business is always profitable. It’s also one of the four major financial statements  for businesses, and will often be requested if you’re looking to seek credit. So today, we’re going to walk you through how to build a cash flow statement for your business, and what to do with it.

The Components Of A Cash Flow Statement

Before you can build a cash flow statement, you need to know what the main components of it are. This will help you draw all the information you need together and create a solid statement, without any gaps.

Operating Activities: How does your business make money on a day-to-day basis? Everything your business does that relates to generating revenue is included in the operating activities, no matter how thin the connection may be. In its basic format, cash inflows are from customers buying your products or services, and outflows are when you pay for thing that create those sales. Things like employee pay, suppliers, tax and interest all fall into this category.

Investing Activities: This section includes any transactions relating to the sale or purchase of property, equipment or other non-current assets in your investing activities, including expenses tied up in mergers or acquisitions. This is a particularly important section if your business plays the stock market, as you will need to indicate the purchase or sale of securities here as well.

Financing Activities: In this section, you will need to include information about taking out loans to buy property or equipment, issuing stocks to employees, the public or other stakeholders, paying out dividends and more.

So now, it’s time to pull it all together. Generally speaking, there are two ways of preparing a cash flow statement, the indirect method and the direct method.

The Indirect Method

This is the most popular option for most businesses, since the numbers are easy to gather from the accounts and numbers they already maintain as part of business operations. By creating your cash flor statement this way, you can reconcile reported net income with cash generated through operations easily.

To create an indirect cash flow statement, you first need to focus on operating activities, determine net income and remove non-cash expenses. Then, you need to consider your gains and losses on any asset sales made in the reporting period, as well as any changes in receivables, payables and inventories. You should also include any bad debts you’ve written off. Once you’ve done that, you can record your cash flows from investing and financing activities. These two sections are reported in the same way on both types of cash flow statement.

The Direct Method

Due to the differences in reporting operating activities, cash flow statements prepared via the direct method provide a much clearer view of how cash moves through a business. But they’re harder to prepare—which is why they’re less common. Instead of focussing on net income, direct cash flow statements focus on gross cash inflows and outflows that happen naturally through your operations. This means you will need to consider cash received from each client account, cash paid to employees and suppliers, interest payments, income tax payments and any interest or dividend revenue received. With this method, it is easier to see where cash payments were made and received, but it won’t necessarily reconcile with your books.

At Debtcol, we specialise in helping businesses understand their cash flow and manage their debtors, improving their business health and cash flow. Our experts can help on both a one off and ongoing basis, with services ranging from simple debt collection to business investigation. For more information, just get in touch with one of our team today, and we’ll be happy to help.