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Creating Cash Flow Statements

Author: Master R Stell Date: March 07, 2002


For a small business, no bookkeeping tool is more important than the cash flow statement, which projects cash inflows and outflows for a specific period of time. Why is this particular statement so important? Simply because most small businesses have limited resources for borrowing money quickly. This statement serves as an early warning system to alert when a cash-flow problem may be coming. In today's Workshop, Jeffrey Moses describes how to create and use a cash flow statement, which is sometimes called a pro forma cash flow.

There are five central sections to the cash flow statement:

  1. Beginning cash balance, which includes the starting available cash for the period of time to be considered.
  2. Projected cash sources, which include accounts receivable and other sources related to the business (such as investment income, royalties, rents due, investor equity, etc.).
  3. Projected cash uses, which include all costs of business operation (salaries, benefits, purchases, manufacturing costs, cost of goods, utilities, loan payments and expenses, marketing expenses, taxes, etc.).
  4. Projected net change. This section is determined by subtracting the total of projected cash uses (#3) from the total of projected cash sources (#2). For instance, if total projected cash sources was $150,000 for a period, and total projected cash uses was $125,000, the projected net change would be $25,000. Note: the projected net change for a period may be negative. This would occur if projected cash uses was greater than projected cash sources.
  5. Ending cash balance, which is calculated by adding the projected net change (#4) to the beginning cash balance (#1). The "ending cash balance" then becomes "beginning cash balance" for the next cash flow statement period.



The section of the cash flow statement that is most often found to be inaccurate is projected cash sources. This is because customers may pay more slowly than anticipated, and because sales volumes may take unexpected ups and downs, even when projected only a month in advance.

Projections for all types of accounting statements can never be 100% accurate. Consult with your accountant, attorney or business adviser when putting together your own cash flow statement so that all specific information for your particular business is included.

Some books of interest on the subject:

  1. Financial Statements: A Step-By-Step Guide to Understanding and Creating Financial Reports, by Thomas R. Ittelson $15.99 February 1998 Career Press
  2. Understanding Cash Flow (Finance Fundamentals for Nonfinancial Managers Series), by Franklin J. Plewa and George T. Friedlob (Contributor), about $16, 256 pages, April 1995, John Wiley & Sons



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