7 Basic Steps to Creating A Cash Flow Statement For Business Owners

Creating A Cash Flow Statement For Business Owners
Creating A Cash Flow Statement For Business Owners

The cash flow statement is a financial document that outlines all cash coming in and out of business during a set period.

When you create a cash flow statement, it creates a picture that offers an overall assessment of the health of a business — an excellent convincing point for investors and analysts to see if a company is on the rise or experiencing struggles.

For some people, the ability to create a cash flow statement appears to be innate. While for others — like me — I have to turn to outside experts because even though I have a MBA, I’ve never quite been able to master how to create a cash flow statement that makes sense.

That’s a really important point — if you don’t feel comfortable developing a strong, logical cash flow statement, then you are far better off to find an expert who can lend a hand and ensure that your cash flow statement stands up to investor or financial expert scrutiny.

But if you are willing to at least give it a try, here are seven basic steps in creating a cash flow statement:

Types of Cash Flow

  • Operating activities. This relates to the net income of the company and includes revenue and expenses.
  • Investing activities. This is a rundown of all financial events involving non-current assets such as long-term investments, properties, and the principal amount of loans made to other entities.
  • Financing activities. These are cash activities that tackle the non-current liabilities and equity of owners, including principal amount of long-term debt, dividend payments, and stock sales and repurchases.

Step 1. Basic Documents and Data Gathering

The cash flow statement requires that you collect documents such as the balance sheet, statement of comprehensive income, statement of changes in equity, statement of cash flows, and other pertinent details regarding material transactions.

All these must cover the reporting period of the cash flow statement.

For material transactions, you can refer to significant contracts of the company, minutes of important meetings, legal department files, and long-term investment documents.

Step 2. Calculations of Balance Sheet Changes

It gets technical here with all the computations. But the bottom line is to exhibit the company’s assets and equity and liabilities. For this part, you can use general ledger accounts instead of balance sheets to get more precise details. The balance sheet shows aggregated figures. It all comes down to how much detail the cash flow statement needs.

Step 3. Balance Sheet Change Inputs to Cash Flow Statement

Each balance sheet change has an impact on the cash flow statement. Even if it is a non-cash item movement in the balance sheet, it has to be adjusted.

Typically, the cash flow statement from a previous period can be used and then taken away the individual caption titles. You will have the same items for the current period and just add additional lines for new items.

When you are done putting in the balance sheet changes, you should have two columns. The first one is the title of individual cash flow captions. The second column will have the assigned balance sheet changes. It is important to perform a check. The total of the 2nd column should be zero. If it does not look that way, there may be some errors, and you need to review it.

Step 4. Adjustments for Non-Cash Items from the Total Comprehensive Income Statement

With a solid base for the cash flow, you need to take the profit or loss statement and the statement of other comprehensive income. Identify the numbers where non-cash transactions might have been logged. Be on the lookout for the following adjustments:

  • Income tax expense
  • Interest income and expense
  • Depreciation expense
  • Recognition expense or derecognition income
  • Foreign exchange differences at the period end
  • Revaluation of assets and liabilities
  • Barter transactions

Make adjustments upon the identification of the non-cash transactions in the separate column. Find all within the statement of total comprehensive income. Verify totals with each adjustment.

Step 5. Non-cash Items Adjustments from Other Information

This is the same as Step 4, but you will look for other information sources. The important thing is that the total should always be zero.

Step 6. Verification via Material Balance Sheet Item Movements

The cash flow will be significant to the credibility of the company, so make sure the information is correct. Take the essential items in the balance sheet and reconcile between the opening and closing balance.

Step 7. Final Check for the Cash Flow

When all verifications have been done, it is time to create the last column. This is the cash flow instead. Calculate the changes in the balance sheet for the individual caption adjusted for each non-cash item. This will provide the cash movement for that caption. Find the vertical total of the last column; it should be a zero to make it a successful cash flow statement.

Assurance from a Professional

Preparing a cash flow statement can get tricky and technical. For best results, hire the services of a qualified financial professional who has experience developing cash flows. It may be cost a few dollars, but in the long run, it is well worth it.

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