11th, Mar 2021

Writing a Cash Flow Statement

Writing a Cash Flow Statement

The Cash Flow Statement is one of the most important statements for your Business Plan. Although most business owners get their accountant or bookkeeper to keep track of their financial statements, it is highly recommended that you have a clear understanding of how they work and what it means for your business. If you have never written a Pro-Forma Cash Flow Statement for your business plan before, then you have come to the right place.

Why is it important to write one?

At times, business owners tend to forget that “Cash is King”. Without cash, your business is open to huge risks, making it vulnerable to potential bankruptcy. I am not saying this to scare you but rather tell you the cold hard facts as to why it’s important to understand how much cash you have on hand at all times. For your business plan, it’s very important to ensure that you are budgeting your cash appropriately and ensuring that you always have enough cash in the bank to cover unexpected costs which do occur.

Understanding the Statement:

The statement itself is very easy to understand if you take the time to learn it. To start off with the basics, think about your own personal bank account. In this day and age everyone should really have one if they want to get paid or store their money. Now imagine that you get hired for a company and get paid by an employer a month later. You feel great that day because you see cash in of X dollars come into your bank account. In this case let’s say you get paid $2000 for your first month of hard work. Now you are ready to pay your expenses. So you pay for your rent or mortgage, utilities, property tax, food, gas etc. By the end of the month your total expenses or in this case you cash out equals $1800 (hypothetically for this example). By the end month you also realise that you have $200 dollars which you did not spend. The following month what happens to this $200? Does it disappear? No. Simply put, the $200 dollars that you did not spend last month now moves forward to the next month in an account you can call Previous Month Balance. Is this simple? Does it make sense? Let’s take a look at a visual of what we just did.

Month 1

Cash in (Pay day): $2000
Cash out (Expenses): $1800
Net cash (Money left): $200

Month 2

Cash in (Pay day again): $1800 (hypothetically)
Cash out (Expenses): $1700 (hypothetically)
Net cash (Money left): $100
Previous Month Cash: $200
Cumulative Cash Flow: $300

The thing you must note is that since you started month 1 with $0 in your bank account in this example, you do not have a previous month. Therefore it does not have the additional two steps that month two has if you were to write your personal banking cash flow statement. Now, for business purposes, there is just one additional step which I have added for this example and refer to as drawings. Drawing’s is basically the money you are taking out of the business to pay yourself. No, it’s not an expense but rather money that you use to pay yourself (take out from your bank) so it is separated from your expenses. I will discuss this in detail next.

Business Cash Flow Statement:

Now that you have an understanding of how it works for your personal bank account, let’s take a look at your business. With your business, what you should be doing is really breaking down where your cash in is coming from, where you are spending your cash and then determining how much money you have left. In other words, you need the details of each.

Some examples of Cash in:
Sales Tax (Money is coming in from collecting tax from customers even though it is given to govn’t)
Accounts Receivable Collected
Grant Funding
Personal Investment
Family Investment
Basically any money you are getting into your business in cash is Cash in.

Some examples of Cash out:
Equipment Purchases
Automobile (Gas, Repair etc.)
Basically any money you are spending on your business in cash is Cash out.

Drawings, as mentioned earlier is money that you take out for personal use, or in words your paycheque. We all love to get paid, let’s face it. However, not everyone who is in business can be paid right off the bat. You may find out that after doing your cash flow budget for your business plan that you have a negative month end cash flow from the get-go. How can you draw money when you have nothing in the bank account? How can banks trust your business if it does not have feasible and realistic month end cash balance? Remember, a bank wants to be paid principal + interest for a loan you get from them, and if you don’t have money in your account then you are out of luck in securing any sort of financing from a big institution. So my recommendation is that if you do have cash every month end, you should only take out as much as you need to live off and pay your necessities food, water and shelter until your business stabilizes. Why I recommend this is that because your business is the most risky during its start-up phase, you need to ensure that money is reinvested into your business to ensure financial security and future growth.

Let’s do an example so you have an understanding of how it works for your business:

Month 1

Cash in (For the month):
Sales (Plus) $2000
Loan from Bank (Plus) $1000
Total Cash In (Equals): $3000

Cash out (For the month):
Advertising (Minus) $500
Rent expense (Minus) $1000
Wages (Minus) $300
Internet/telephone (Minus) $100

Net Cash (Equals) $1100

Previous Month Cash (Since this is first month $0) (Plus) $0
Owners Drawings (Minus) $1000
Cumulative Cash Flow (Excess Cash for next month) (Equals) $100

Now, if you were to do a cash flow for month two, then you would have a previous month cash balance of $100 because this was not used in the first month. Therefore you can say that your business has a buffer of $100 (projected) for the first month for any unexpected costs in your budget. You should try to keep a reserve of at least 10% each month. You can base this off the net cash you receive + previous month balance. In the case above I have $100 which is not far from the 10% which is $110. To find the 10% value multiply Net Cash Value $1100 + Previous month value in this case $0 by 10% on your calculator.

Final thoughts:

Cash flow statements can be written in many different ways, this is to help you understand how they work, especially if you are writing your business plan. The statements you come across may not look exactly the same but the idea behind it is. The cash flow statement looks at the cash flow of your business and how much CASH your business has coming in and how much you are spending on expenses in cash.

Although it’s not illegal to mix your personal and business account together, if you plan to become a small business owner, I suggest you open up separate accounts for both your personal and business to ensure that you are tracking all your expenses accordingly. Otherwise you will be trapped in trying to audit your business expenses from your personal expenses which will take up a lot of unnecessary time.

Popular Posts

  • Writing a Cash Flow Statement

  • How to Register your Small Business

  • Top 10 Bookkeeping Tips for Small Businesses

  • When should you register for HST?

  • Accounting? I just don’t get it.