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

  • 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

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

Step 3. Balance Sheet Change Inputs to Cash Flow Statement

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

  • 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

Step 6. Verification via Material Balance Sheet Item Movements

Step 7. Final Check for the Cash Flow

Assurance from a Professional

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