How To Prepare A Cash Flow Statement – Startup Business Accounting
By C. Worrall
Your cash flow statement based on your other statements. All three statements tie into each other.
The first section of your cash flow statement is cash flow from operations. Cash flow from operations shows the cash that is coming into or leaving your company based on your operations.
| The first line of your cash flow from operations should be net income after taxes and interest, but before dividends. The second line should be depreciation which is brought down from your income statement. |
Following these two lines should be the changes in your assets (aside from property, plant, and equipment), followed by changes in your liabilities from period to period – both of these items come from your balance sheet and can be broken out line-by-line according to how they are shown in your balance sheet.
The equation to get you were cash flow from operations is:
cash flow from operations = net income + depreciation – change in assets + change in liabilities
Think of how your cash comes into your company: if you
| increase the value of your assets, you will have less cash. For example, if your accounts receivable increases, you were waiting to receive cash from the revenues you have generated, but you |
do not have the cash yet.
On the liability side, if you were able to hold off paying vendors for longer periods of time, then you would have more cash in your bank account.
The next section the cash flow statement is cash flow from investment. In general, this is the money you have invested in plant, property, and equipment. This section would also include investment in subsidiaries or other capital areas. If you sold either of these, it would show up here as well.
The following section is cash flow from financing. Financing includes equity investment, loans and other debt, any stock repurchase, and any dividends paid.
To get the cash flow for this particular period, you must take the cash flow from operations, subtract the cash flow from investment, and add the cash flow from financing. Some accountants put a negative number in the cash flow from investment section, and would therefore, add all three sections together to get the cash generated (or lost) for the current period.
Add the cash generated for the current period to the cash at the beginning of the period to get the cash at the end of the period. This number will be entered into the cash line of the balance statement.
I have included an example set of statements that will show you how all of the statements are tied together. Visit my blog, CFO Yourself, to download the example Excel spreadsheet. Note that the cash is going down even though the revenues are going up. That’s because in this example the debt is being paid down faster than the company is generating income. Basically, at the beginning of the year, this company is trading debt for an equity investment.
Ms. Worrall is the President of Worrall Consulting, LLC. Worrall Consulting is a finance and business strategy consultancy providing professional services to high growth, early stage companies. The company provides capital formation assistance, market research and business intelligence, and business planning strategy. More information about the company can be found at http://www.worrallconsulting.com, Additional financial and strategy advice can be found at http://www.cfoyourself.com
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