Cash Flow Statement Example with Solution and Its Importance

A cash flow statement is a financial snapshot that helps businesses understand how their money is being used. It's a crucial tool for making informed decisions about investments, expenses, and revenue streams.

A well-crafted cash flow statement can reveal areas where a business is struggling to make ends meet, such as a high number of accounts payable or a low cash balance. This information can be used to make adjustments and improve the company's financial stability.

The cash flow statement example with solution we'll be looking at in this article will illustrate how to create a statement that accurately reflects a business's financial situation.

Calculating cash flow is a critical step in running a business, and it's not just about keeping track of what's coming in and out. Knowing your present, future, and predicted cash flows helps you understand your business's financial health and plan for what's to come.

Having a healthy Free Cash Flow (FCF) is crucial when looking to attract a business partner, as they'll want to see if the venture is viable. FCF is calculated by adding net income and depreciation/amortization, then subtracting change in working capital and capital expenditure.

The cash flow statement is important because it shows the actual amount of cash a company receives from its operations, which is different from the income statement and balance sheet that use accrual accounting. This statement helps management, analysts, and investors understand how well a company is running its operations.

A cash flow forecast is essential for planning, and it's calculated by adding beginning cash, projected inflows, and subtracting projected outflows to get ending cash. This helps you understand your business's financial situation and make informed decisions.

Here are the key benefits of calculating cash flow:

Calculating cash flow also helps you compare operating cash flow to net income, which measures how well a company is running its operations. This comparison is reflected in the cash flow statement, which provides a clear picture of a company's financial situation.

A cash flow statement is made up of three main sections: Operating Activities, Investing Activities, and Financing Activities. These sections help determine your enterprise's strength, profitability, and long-term viability.

The Operating Activities section includes cash inflows and outflows from your business operations, such as sales, purchases, and expenses. The Investing Activities section includes cash inflows and outflows from investments in assets, such as property, equipment, and investments.

To determine your current amount of cash, you can break down your cash flow statement into three different ways: Cash at beginning of period, Cash at end of period, and Change in cash. Here's a breakdown of each:

The indirect method of presenting cash flows from operating activities is a common approach used by most companies. This method begins with a measure of profit, which can be net income, operating profit/EBIT, or earnings before tax.

Some companies may have discretion in choosing which profit metric to use. For instance, if the starting point profit is above interest and tax in the income statement, then interest and tax cash flows will need to be deducted if they are to be treated as operating cash flows.

The exact starting point for the reconciliation will determine the exact adjustments made to get down to an operating cash flow number. A reconciliation table can help illustrate the process, as shown below:

Depreciation and Amortization (D&A) are expenses that allocate the cost of an asset over its useful life.

These expenses reduce net income in the income statement, but they're non-cash expenses, meaning no cash transactions are involved.

Depreciation involves tangible assets like buildings, machinery, and equipment, whereas amortization involves intangible assets such as patents, copyrights, goodwill, and software.

We add D&A back into the cash flow statement to adjust net income because these expenses don't involve cash transactions.

Calculating cash flow is a crucial step in running a business, and it's essential to understand the two main methods: direct and indirect. The direct method involves recording all cash transactions, which can be a huge added bookkeeping burden, whereas the indirect method starts with the cash from operating activities and works backward to calculate the net cash flow.

The indirect method begins with a measure of profit, and some companies may have discretion regarding which profit metric to use, such as net income, operating profit/EBIT, or earnings before tax. The exact starting point for the reconciliation will determine the exact adjustments made to get down to an operating cash flow number.

To calculate cash flow from operating activities, you need to consider the main cash inflows and outflows, including receipt of cash from sales, interest payments, tax payments, rent, payments to suppliers, and so on. The following table summarizes the key components of cash flow from operating activities:

By understanding the different components of cash flow and how to calculate them, you can effectively manage your cash flow and make informed decisions about your business.

Calculating cash flow is a crucial step in managing your business. It's not just about keeping track of what's coming in and out of your business, but also about understanding your business's financial health and planning for the future.

There are two main methods to calculate cash flow: the direct method and the indirect method. The direct method involves recording all cash as it enters and leaves your business, which can be a huge added bookkeeping burden. On the other hand, the indirect method starts with the cash from operating activities and works backward to remove non-cash revenue and expenses.

The cash flow from operating activities includes all the money coming into and leaving your business due to normal day-to-day processes. This includes cash flow in from the sale of goods or services, and cash flow out from expenses such as interest payments, tax payments, rent, and payments to suppliers.

To calculate cash flow, you can use the following formula: Net cash flow = Cash receipts - Cash payments. You can also separate cash flow by category: operating, financial, and investment.

Here's a breakdown of the indirect method presentation:

This formula helps to reconcile the cash flow statement to the income statement.

Calculating Return on Investment (ROI) is crucial to understanding the financial health of a business.

A company's ROI is determined by dividing its net gain by its total investment.

This means if a business invests $100 and earns a net gain of $20, its ROI is 20%.

To calculate ROI, you need to know your total investment and your net gain.

For example, let's say you invested $500 in a project and earned a net gain of $150.

Your ROI would be 30%, which is calculated by dividing the net gain by the total investment ($150 ÷ $500).

By calculating ROI, you can compare the performance of different investments and make informed decisions about where to allocate your resources.

Calculating and managing your company's burn rate is crucial to its survival. Burn rate measures how quickly your company is losing money, and it can be expressed as a percentage of the total cash you have on hand.

One of the best ways to stretch your cash flows during the pre-revenue phase is to use subscription services yourself. This can help turn higher upfront costs into manageable monthly expenses.

Getting from the pre-revenue phase to "ramen profitability" can be difficult, and a high burn rate can make it even harder.

SaaS business owners face persistent cash flow-related problems, including determining their level of liquidity to pay expenses.

A cash flow statement is essential for gauging liquidity and assessing financial health, as shareholders and investors closely examine it.

Predicting future cash flow is also possible with a cash flow statement, which helps with budgeting and applying for loans or credit.

Good cash flow planning is invaluable for any SaaS business, and it's essential to understand its benefits. Accurately visualizing and tracking expenses can help you quickly identify inconsistencies and eliminate unnecessary expenses, ultimately increasing your profit.

Having a clear line of sight into your liquidity parameters gives you the information to optimize your outgoing and incoming money streams. This is crucial for making informed financial decisions and ensuring the long-term sustainability of your business.

By implementing good cash flow planning, you'll be able to identify areas where you can cut back on unnecessary expenses and allocate that money towards growth initiatives or paying off debt. This can be a game-changer for SaaS businesses looking to scale quickly and efficiently.

Here are some specific benefits of cash flow planning for SaaS businesses:

Many SaaS business owners face persistent cash flow-related problems from time to time.

A cash flow statement is crucial for determining a company's strength, profitability, and long-term viability. It helps gauge the level of liquidity, or whether you have sufficient cash to pay your expenses.

SaaS business owners often struggle with reconciling their cash flow statement to the income statement, making it a tedious and difficult accounting task.

Forecast+ by Baremetrics can automatically generate your cash flow statements, removing the need for tedious accounting tasks.

You'll need to provide up-to-date financial statements to your lender if you're applying for a loan or a line of credit, and a cash flow statement is a key part of that.

To start preparing and using the cash flow forecast template, you'll need to download CFI's free Excel template and start practicing today. This will give you a solid foundation to work with.

The template entry for "Receipts" includes the cash flow from all revenue-producing activities. Use accurate figures from the past for accuracy in forecasting, and consider seasonality, industry benchmarks, and trends related to your market area that can impact revenue.

The template entry for "Direct costs" includes costs that can be directly tied to the production of specific goods or services. This can include variable costs associated with production levels such as inventory.

For "Overheads", you'll want to include all fixed or variable expenses required for the operation of a business. Be sure to only include expenses relevant to your business.

The template entry for "Total cash payments" is calculated for you based on your entries, but you can also find this number by subtracting costs from receipts/revenue.

Here's a breakdown of the key template entries:

Remember to use the template entries to calculate your "Net cash flow" by simply putting the net amount of cash flowing in and out of your business.