How to Understand Cash Flow Statements
Manage Your Benjamins
JOURNEY
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YOUR BUSINESS FINANCIAL STRATEGY
What is a Cash Flow Statement?
Cash flow is the combination of the amount of money coming in and going out of your business and,
critically important to your operations, the timing of cash movements.
Therefore, a Cash Flow Statement maps sales to customers and when you pay bills, especially payroll.
Diligently tracking the money coming in and out of your business is very important because even
profitable businesses can fail if they don’t have the right amount of cash available at the right time.
Here are some key terms for you to review as you explore Cash Flow Statements.
Amortization: an accounting method used to spread the cost of an intangible asset, such
as reputation or goodwill, over the course of the asset’s life. It functions in the same way as
depreciation for tangible assets.
Asset: something owned by a company that holds value; assets can be physical, like equipment
and inventory, or nonphysical, like trademarks and patents or goodwill.
Balance Sheet: a statement that shows your company’s assets, liabilities and owners’ equity to
indicate financial health at a specific point in time. The goal of a Balance Sheet is to make sure
that your company’s assets are equal to the combination of your liabilities and owners’ equity,
i.e., Assets = Liabilities + Equity (Net Worth). As such, it shows your collection of total assets plus
how they were paid for.
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Cash Flow Statement: a document showing the timing of all cash going in and out of the
business over a particular period of time.
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Current Assets: the sum of cash and cash equivalents, accounts receivable, inventory,
marketable securities, prepaid expenses and other assets that could be converted to cash in less
than one year.
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Current Liabilities: the sum of all money owed by a company and due within one year.
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Depreciation: a calculation to show how your tangible assets lose value over time. While there
are several ways to account for depreciation, the most basic is for an asset’s salvage value
subtracted from its cost to determine the amount to be depreciated.
Income Statement: a statement that shows how your business has performed over a given
period—the amount of profit or loss generated.
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Liabilities: obligations that the company owes, either to vendors, suppliers, and lending
institutions.
Cash Position: the amount of cash you have available for use.
How to Use a Cash Flow Statement
To use a Cash Flow Statement, you’ll typically take the following steps:
1. Enter the starting balance, which is the cash on hand from your Balance Sheet.
2. Enter the amount and time when cash came into your business.
3. Enter the amount and time when cash went out of your business.
4. Subtract the amount of cash going out from the amount coming in. This number will give you
your cash position. Looking at this over time gives you your cash flow.
Before we explore a Cash Flow Statement, let’s first look at a cash flow planner.
CASH FLOW PLANNER
Below, you’ll find a cash flow planning tool (planner). This planner will help you see, in detail, the
cash inflows and outflows before you explore a detailed example of a Cash Flow Statement later in
this section.
The planner below has been created for Jayne’s Locksmith Company (JLC), a small business that
installs locks in commercial buildings.
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When using this cash flow planner for your business, change the category labels in the le column as
necessary to fit your accounting system.
As you review this planner, ask yourself line by line when you should expect cash to come and go.
Predict when you’ll actually collect from customers.
On the expense side, predict when you’ll actually have to write the checks to pay those bills.
For example, rent and utility bills are usually paid in the month they are incurred. Insurance
and some types of taxes may actually be payable quarterly or semiannually, even though you
recognize them as monthly expenses.
EXAMPLE: CASH FLOW PLANNER (12-MONTH)
FOR JAYNE’S LOCKSMITH COMPANY (JLC)
Note: All numbers within closed brackets ( ) are negative numbers.
Q1 Q2 Q3 Q4 Total Notes
Total
Item
Cash on
Hand
(beginning of
month)
$179,248 $251,753 $281,008 $288,113 $335,376
This figure comes from
the Balance Sheet.
CASH RECEIPTS
Sales $146,000 $128,000 $223,000 $250,000 $747,000
Total sales for the year
is $747K. This figure
comes from the Income
Statement.
Collections
from A/R
accounts/CR
accounts
$22,000 ($7,000) ($8,000) $5,000 $12,000
In Q1 JLC collected $22K
of the $26K of A/R due
from last year.
Q2 and Q3 A/R increased.
In Q4, JLC collected as
much as possible.
TOTAL: The change
in account receivables
is $12K.
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Q1 Q2 Q3 Q4 Total Notes
Total
Item
CASH RECEIPTS
Loan/other
cash
injection
$150,000 $150,000
Q3 loan of $150K on a
$175K machine. $25K
dierence between
machine cost and JLC
loan amount is down
payment.
Total Cash
Reciepts
$168,000 $121,000 $365,000 $255,000 $909,000
Total Cash
Available
(before cash
out)
$347,248 $372,753 $646,008 $543,113 $1,244,376
Cash on hand + total cash
receipts
CASH PAID OUT
Purchase
(merchandise)
cash
$2,300 $3,000 $21,500 $12,90 $39,700
Q1: $2,300K worth of
purchases in cash
Q2: $3K, etc
Purchase
(merchandise)
A/P (accounts
payable)
$42,300 $27,600 $69,900
Purchases made on
account
A/P payments
(- increases)
$2,000 $3,000 ($16,000) $10,000 ($1,000)
In Q1, paid $2K of last
period’s A/P
Gross wages
(exact
withdrawal)
$45,000 $42,000 $61,000 $77,000 $225,00
Paid salaries/ wages.
Wages increased with the
addition of machinist.
Payroll
expenses
(taxes, etc.)
$6,750 $6,300 $9,150 $11,550 $33,750
Payroll expense is 15% of
gross wages.
Outside
services
0
Supplies
(oice &
oper.)
$2,500 $2,000 $10,000 $5,500 $20,000
Q3: larger supply
expense in preparation
for manufacturing
Repairs &
maintenance
0
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Q1 Q2 Q3 Q4 Total Notes
Total
Item
CASH PAID OUT
Advertising $1,000 $500 $1,500 $2,000 $5,000
Variation in expenditure
in Q3 and Q4 due to new
services. Also, JLC
typically spends more on
advertising at the end of
the year.
Car, delivery
& travel
$2,600 $2,600 $2,600 $2,600 $10,400
Car allowance figure
comes from income
statement.
Accounting &
legal
0
Rent $12,000 $12,000 $12,000 $12,000 $48,000
Rent comes from income
statement.
Telephone $845 $845 $845 $845 $3,380
Telephone costs come
from income statement.
Utilities $4,500 $3,500 $6,000 $7,000 $21,000
Utility expense increased
at end of year based on
season and running of
the machine.
Insurance $4,000 $4,000 $8,000 $8,000 $24,000
Increase in insurance due
to machine operation
Taxes (real
estate, etc.)
$2,400 $2,400
Personal property tax on
machine due
Interest $4,500 $4,500 $9,000
Accrued
expense/
payable
(decrease-
increase)
($2,400) ($3,500) ($5,900)
Money JLC has not paid.
On balance sheet $3,500
owed for payroll taxes.
$2,400 owed for per-
sonal prop taxes. Both
payments are owed at
the end of the period and
paid next year.
Income taxes $12,000 $12,000 $12,000 $22,242 $58,242
Other (specify) 0
Miscellaneous 0
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Q1 Q2 Q3 Q4 Total Notes
Total
Item
CASH PAID OUT
Subtotal $95,495 $91,745 $175,395 $200,237 $562,872 0
Loan principal
payment
$7,500 $7,500 $15,000
Q3 and Q4 payment on
loan for machine bought
on July 1
Loan principal payment
takes cash out of the
business and, therefore,
is an important factor to
include in the cash plan.
Capital
purchase
(specify)
$175,000 $175,000
Q3 and Q4 payment
on machine bought on
July 1
Capital purchases take
cash out of the business
and, therefore, are an
important factor to
include in the cash plan.
Other startup
costs
0
Reserve and/
or escrow
0
Owner’s
withdrawal
0
Owner’s draw takes cash
out of the business and,
therefore, is an import-
ant factor to include in
the cash plan.
Total Cash
Paid Out
$95,495 $91,745 $357,895 $207,737 $752,872 0
Cash Position
(end of
month)
$251,753 $281,008 $288,113 $335,376
Monitor the cash
position. If it gets too
low or negative, JLC
will need to pump in
more cash to keep the
operation going.
$179,248
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Q1 Q2 Q3 Q4 Total Notes
Total
Item
ESSENTIAL OPERATING DATA (non–cash flow information)
Note: This section is not actually part of the cash model, but it allows you to track items that have a heavy impact on cash.
Sales volume
(dollars)
Accounts
receivable
Bad debt (end
of month)
Inventory on
hand (end of
month)
Accounts
payable (end
of month)
Depreciation
Note: The example above has been created using modified SCORE Excel templates.
SAMPLE CASH FLOW STATEMENT
Cash flow projection is the best way to teach you how to meet your working capital needs. Your historic
Cash Flow Statements can guide you in projecting your future cash flow to help you plan for the future.
EXAMPLE: JAYNE’S LOCKSMITH COMPANY (JLC)
This example Cash Flow Statement shows how JLC manages their cash by selling locks to customers
and continuing commercial and residential installations. Note: Cash Flow Statements for accounting
purposes reflect less information than a cash flow planning worksheet. For more details, please refer to
the cash flow planner above, and use the template to create your own planner.
Note: All numbers within closed brackets ( ) are negative numbers.
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Y1 Notes
Cash flows from operating activities
Net income $35,520
The net income figure comes
from the Income Statement.
Adjustments to reconcile net income to net cash used in operating activities
Depreciation and amortization 0
This figure depicts the noncash
expense. Depreciation is listed in
the Income Statement.
Changes in operating assets and liabilities
Accounts receivable 0
This data comes from the
Balance Sheet. Note: Increasing
assets reduce cash, and
increasing liabilities increase
cash. Here, JLC is seeing an
estimated decrease of $12,000
($26K to $14K).
Inventories 0
From the Balance Sheet. Note:
Increasing assets reduce
cash, and increasing liabilities
increase cash. JLC is seeing an
estimated increase of $10,000
(from $12K to $22K).
Other current assets 0
Accounts payable 0
These numbers come from
the Balance Sheet. Y3 has $1K
increase in accounts payable.
Other current liabilities 0
These numbers come from
the Balance Sheet.
Total adjustments 0
Net cash from operating
activities
$35,520
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Y1 Notes
Cash flows from investing activities
Purchase of property
and equipment
0
Fixed assets on the
Balance Sheet
JLC will buy the machine. The
projected cost is $175, out of
which $25K is down payment.
Investment purchase 0
Net cash used in
investing activities
0
Cash flows from financing activities
Proceeds from notes payable 0
Loan for equipment (less down
payment)
JLC’s down payment = dierence
between $175K and $150K.
Depreciation for this shows up
on the Income Statement.
Change in long-term debt
Paid down note on machine
by $15K
Change in owner-invested capital 0
Net cash provided by
financing activities
0
Net increase (decrease) in cash
and cash equivalents
$35,520
Cash and cash
equivalents, beginning
$50,000
This is the same as the figure
at the end of the previous year.
It depicts the beginning cash
for next year.
Cash and cash
equivalents, ending
$85,520
Note: The example above has been created using modified SCORE Excel templates.
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1
Start with a Balance Sheet, U.S. Small Business Administration, https://www.sba.gov/business-guide/manage-your-business/
manage-your-finances#section-header-0 (accessed April 11, 2019)
2
Glossary of Business Financial Terms, U.S. Small Business Administration (June 20, 2018), https://www.sba.gov/document/
support--glossary-business-financial-terms (accessed April 11, 2019).
3
Ibid.
4
How to Prepare a Loan Package, https://www.sba.gov/sites/default/files/How_To_Prepare_a_Loan_Package_Transcript.pdf
(accessed April 11, 2019).
How to Use a Cash Flow Statement
Cash Flow Statements help you manage the timing and amount of money coming in and out of your
business over a specific period of time.
Use the cash flow planner resource provided for this tool to practice creating a cash flow planner for
your business.
Disclaimer: The business appearing in this work is fictitious. Any resemblance to an actual business is
purely coincidental.
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