Customizable Cash Flow Worksheet

The cash flow statement is used to analyze the cash inflows and outflows (where the money went) during a designated time period. Recall from the introduction that there are three major components of cash flow: operations, investing and financing.

If you regularly do a monthly profit and loss statement, you will be aware that there are certain items which may not affect your profit and loss statement for some time, such as:

• Substantial increase in inventory purchases;
• Increase in accounts receivable (money owed to you by customers);
• Reduction of credit by suppliers;
• Purchase of equipment;
• Unrecognized obsolescence of inventory (stale items);
• Bank's refusal to renew or extend loan; and
• Lump sum payment of debt.

A cash flow statement will highlight these activities in a way that an income statement will not. And certainly your banker will want to see a cash flow statement showing how you have used the funds from a previous loan before they approve an extension or a new one. Without the cash flow statement, you will have an incomplete picture of your business (refer to the Interrelationship of Financial Statements).

Preparing the Cash Flow Statement
In the lesson for preparing your annual cash flow projection, we detailed all the operating sources and uses of cash (cash revenues, purchases, salaries, rent, etc., etc.). This method may be easier when you are preparing a projection, and can also be used to prepare your actual cash flow statement at the end of the period. But you can also obtain the same result in an easier manner, which we will illustrate in this lesson.

To determine operating cash flow, you start with net income and add back expenses which did not result in inflows or outflows of cash. The most common non-cash expense is depreciation. When working with historical figures, adjusting net income with depreciation and other non-cash expenses is much simpler than determining all the revenues and expenses which require or provide funds.

Next, you identify all the balance sheet accounts that are associated with operations and determine the change in the account from the end of the last period to the end of the current period. What balance sheet accounts are we referring to? Let's take another look at the operating cycle to see what accounts to include.

Operating cash flow will include all the balance sheet accounts that are a part of normal operations. Trade receivables and payables as well as accrued expenses, prepaid expenses and other current assets that are a part of day-to-day operations are included in operating cash flow as we'll show in the example.

But what about the other balance sheet accounts - how do they fit in to this picture? The remaining balance sheet accounts will either be investing activities or financing activities. Once again, you determine the change in each balance sheet account from the beginning of the period to the end of the period, tally them up, and there you have it -- a complete picture of the cash flow for your company.

Let's take a look at an example. We'll begin with the Balance Sheet that we used in the lesson on financial statements. You might want to go to this sample Balance Sheet and print it out so that you can follow along. Ready, okay, then let's turn to the example and walk through the steps to preparing the cash flow statement.