|This piece has been written in collaboration with Esther Friedberg Karp, an esteemed bookkeeper and QuickBooks ProAdvisor.|
A cash flow statement - or “statement of cash flows” - is an important part of overall financial reporting and gives you insight into how your business is performing.
The statement is essentially used to understand incoming versus outgoing cash so you can see your business’ cash flow. A cash flow statement answers the questions “Where did our money go?” and “Where did our money come from?”
Tracking cash flow is a crucial part of finance as it’s a summary of cash inflows and outflows and can be helpful for planning short-term activity and long-term growth.
Otherwise, it’s too difficult to spot the signs of a failing business before it’s too late and this is an issue for businesses around the world.
|In fact, a global study by Intuit, the company behind QuickBooks, reported that 89% of small business owners dealing with cash flow problems found that it negatively impacted their business and its growth.¹|
This article will look at what a cash flow statement is, examples of cash flow statements, and what goes into them, as well as a step-by-step explanation on how to prepare a cash flow statement.
|The article will cover|
A cash flow statement is a financial report that summarizes the incoming and outgoing of funds in a business.
It measures cash inflows and outflows, and how well a company is doing in generating cash. Cash flow statements look at operating expenses, business investments, and financing to make up the summary.
When it comes to looking at the financial health of your business, a cash flow statement is one of the first reports that’s considered. For publicly traded companies, it is a requirement.²
But even if your business is not publicly traded, a cash flow statement is incredibly important for tracking cash inflow and outflow.
From a strategic perspective, a cash flow statement gives you clarity on how to plan for risk, and the level of risk you’ll be facing.
By understanding how much cash is coming in versus how much is going out, you can identify opportunities for improvement and plan business growth accordingly.
A cash flow statement provides a great deal of oversight that can help with operations and planning for international businesses.
When operating in multiple countries and currencies, cash flow can be harder to track. A cash flow statement can be a valuable tool when applying or repaying loans for your business, or for ensuring that your offerings are priced appropriately for different markets.
You can also use tools such as a multi-currency account for additional oversight and control when managing international territories.
A cash flow statement consists of the three major components:
- Cash flow from operating activities
- Cash flow from investing activities
- Cash flow from financing activities
Let’s look at each of the components in more detail below.
Operating cash flow refers to cash inflows and outflows connected to business activities conducted by the company.³
It’s essentially a measure to see cash flow related to the business and its day-to-day operation, and whether sufficient resources are available to maintain and grow the business.
|Examples of cash flow from operating activities|
Investing cash flow refers to the inflow and outflow of cash that comes from assets needed for the company to generate profits.
Investing activities can refer to any money invested in the business, particularly investments that are meant to be beneficial for the business in the long-term for its activities.
|Examples of cash flow from investing activities|
Financing cash flow is a portion of a company’s cash flow that shows the inflow and outflow of cash to fund the company.
It covers transactions that involve company debt, any equity related to the company, and the disbursal of dividends.
|Examples of cash flow from financing activities|
To help you get started on your cash flow statement, here is an example below.
If you’d like to start your own cash flow statement, you can use Wise’s easy cash flow statement template to better understand your business' financial health and performance.
There are two kinds of cash flow statements, and the main difference is how cash flow from operating activities is presented:
Direct cash flow statements do not start with net income; they look at direct cash paid and received by the business (e.g., Cash paid by customers, cash paid to employees, suppliers, and/or interest).⁴
Indirect cash flow statements start with net income, and the figure is then converted to adjust to cash flow from operating activities (depreciation, accounts payable and/or receivable decrease, etc.).⁵
US-based businesses can choose either option, but indirect cash flow statements are most commonly used.
Once you’re ready to start your own cash flow statement, here are the steps on how to prepare a statement for your business:
Step 1. Determine the net increase in your cash and cash equivalents (i.e., short-term, highly liquid investments) for a given period, such as a quarter or a year.
Step 2. Identify the change in each balance sheet account, including assets, liabilities, equity.
Step 3. For any balance changes, work out if the change results in an inflow (increase or source of cash) or outflow (decrease or use of cash).
Step 4. Ascertain if each balance change is an operating, investing, or financing activity.
When you’re preparing a statement of cash flows, if you have foreign currency accounts, you’ll be challenged to calculate the balance difference in those foreign-denominated accounts and what is the difference in your own currency as well.
QuickBooks Online offers a Statement of Cash Flows report. Be aware that this is denominated in the “home currency” (i.e. the reporting currency of the country in which the company is located) , with foreign currency totals based on the exchange rates in force on each foreign currency transaction.
QuickBooks Online will populate each foreign currency transaction with the default exchange rate in force on the date of the transaction, but these exchange rates can be overridden to account for actual exchange rates offered by banks, credit cards, and, of course, Wise (which offers more advantageous exchange rates and lower fees).
QuickBooks Online’s Cash Flow Planner tool, used for projecting future cash flow, is unavailable in companies in which multiple currencies have been enabled.
The easiest way to prepare a cash flow statement is to have all the information needed in an easy, accessible way - and Wise offers that.
With Wise, you can take full control over business costs and have better insight into its finances.
Manage all your currencies in one place with the Wise multi-currency account. Use one account for access to more than 50 currencies so you can connect with customers and suppliers overseas.
Control access by giving internal or external members permission to your account and check activity easily from the app.
With Wise, you pay what you see; fees are transparent and upfront every time. Save money each time you send and receive money because with Wise, you’ll always get the mid-market rate while saving up to 19x compared to PayPal.
- QuickBooks - Small business payments and cash flow in 2021
- Zions Bank - How to prepare a cash flow statement (pdf.)
- Investopedia - Operating cash flow
- Investopedia - Direct method
- Investopedia - Indirect method
All sources checked 07 October 2021
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