Beginner’s Guide to Preparing a Cash Flow Statement

What is a Cash Flow Statement?

A cash flow statement is the total amount of money, both physical or virtual, transferred in and out of your business. It is a combination of information from your profit & loss statement and balance sheet.

Having cash flow steadily into your business keeps your employees paid and the lights on. You must learn how to convert sales into cash consistently and quickly to build a safety net for your business’s future.

Should I Use the Direct Method or the Indirect Method?

Before starting anything, you must decide which method you should use to prepare your statement. The direct method tallies up each instance of cash received or paid. The indirect method uses accounting line items such as net income and depreciation to arrive at cash flow.

Choosing which method to use depends on each business. Small businesses use the direct method because they have fewer income sources and expenses. If you are a large corporation, your financial health is better represented with the indirect cash flow method.

What Does a Cash Flow Statement Show?

Your cash flow statement shows the following:

Compare cash from operating activities to your business’s net income to determine the quality of earnings. Your earnings are high quality if your cash from operating activities is higher than your net income.

Use your statement to show investors the cash flow coming in and going out. This shows them your overall performance.

If your business is losing money from operation expenses or financial investments, you will see that on your statement.

How to Increase Your Cash Flow

Reevaluate Pricing

Consider changing the price of your products. You might be under-selling or over-selling your merchandise. Find the perfect price-point through testing. If you are under-selling your items, consumers might not take you seriously. If your price-point is too expensive, then people will turn to your competition.

Sell or Lease Equipment

Computer and equipment upgrades happen often with technology advancements. The old equipment can quickly pile up in your office. Consider selling these items for a taxable gain. Keep in mind that you should sell nothing below the book value.

On the flip side, you may decide to lease items instead of purchasing them. Talk to your accountant or bookkeeper to weigh out your options.

Subscription Sales

Use a subscription service for products consumed consistently and repurchased throughout the year. A subscription service allows your clients and customers to prepay for their items. This means you receive cash upfront.

Cash Flow Statement Help

PL Consulting has served the Baltimore, Maryland area for many years. We customize our bookkeeping and accounting services to each client. Your ideas are unique to your business, and we understand that.

Do you need help to prepare your statement? Contact PL Consulting to set up an appointment at 410.764.3731 or contact us on our website.