Financial statements are integral to determining the financial health of any business. One such financial statement is the statement of cash flow. If you are a small businessman bent on keeping your business in top shape, preparing a statement cash flow is one of the skills you must acquire.
Essentially, a statement of cash flow is a document that lists all cash flows into and out of the business during a certain accounting period. An annual statement of cash flow is a must for any business. However, it can also be prepared on a monthly or on quarterly basis. For a small business, it is advisable to prepare statement of cash flows as frequently as possible. Thus, a monthly statement of cash flow is ideal for a small business.
A statement of cash flow can either be a single page or a multiple page document, depending on the time period of reporting. Regardless of the page count, a statement of cash flow is usually broken down into three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.
There are two methods followed in preparing a statement of cash flow – the indirect and direct method. As the name implies, the direct method is a very straightforward way of reporting sources and uses of cash and cash equivalents. You simply analyze your cash and bank accounts under this method. The indirect method, on the other hand, looks at the income and expense accounts as well as working capital. Although these two methods follow different procedures, both methods generate the same amount of cash flow from operating activities.
Most companies in the U.S. use the indirect method of preparing the statement of cash flow. However, if you are just starting your small business, then you may opt to use the direct method since you do not have a lot of line items at the moment. The first thing to do is gather the documents and records you will need to make the statement, including your general detailed ledger.
The next thing to do is analyze the documents. What are your sources of cash and cash equivalents? These may include sales, paid receivables, interest of cash from sales of assets or stocks. How do you use your cash? Money is used to pay for inventory, wages, office supplies, taxes, and rent. It would help to create a worksheet for each line item as you go over the ledger just to make sure that you will not miss anything. A worksheet would also help later in organizing the data you have.
Once you have all the figures you need, you can make now organize them and make major line items for your statement of cash flow. Examples of major line items are cash receipts from customers, cash payments for inventor, cash paid to employees, cash paid for operating expenses, taxes paid, and interest paid. Arrange the information you have into a tabular format, add and subtract figures as need, and you have your statement of cash flows.