Preparing a Cash Flow Statement

October 3, 2017 by Jill Knop, CPA

One of the most important factors in running a business is managing the flow of cash in and out of your hands.

One of the most important factors in running a business is managing the flow of cash in and out of your hands. In our blog series on profit planning, we have been discussing the what and the why of profit planning.

A cash flow statement is a key among many other crucial components that make up an intelligent profit plan that will guide your business from today to next year and beyond.

Purpose

The purpose of a cash flow statement is to evaluate the impact of operations and the financing structure on the cash position of your company. In general, organizations must have sufficient cash to cover their financial obligations at any given point in time. Therefore, it is important that a company know if it will be in a negative or deficit cash position at any point during the year so that it can make arrangements to obtain the required cash on the most favorable financial terms. It is equally important to know how much excess cash you will have so you can plan to use it effectively.

You must estimate the impact of operating flows and financing flows. For operating flows, the inflow of funds is generally increased by increases in operating income and sales of fixed assets; the outflow of funds is increased by increases in long-term asset investment. For financing flows, inflows of funds are increased by increases in income from financial investments; outflows of funds are increased by the retirement of debt obligations.

Function

The cash flow statement is an analytical tool that will help you evaluate the viability and strength of your company, empowering you with the transparency that will enable you to make intelligent and honest decisions with regards to growth, investors, and the future of your business.

To learn more about the other components of an actionable profit plan that will help you stay in control of your business’ finances, read more from our blog. For a comprehensive breakdown of profit planning, download our Owner’s Profit Planning Guide.