FREE Cash Flow Statements | Excel Templates

A cash flow statement is an official financial document showing how much cash and cash equivalents (CCE) flow in and out of your business over a specific period.

A cash flow statement is one of any business’s three vital financial documents, the other two being an income statement and balance sheet.

The statement documents all the sources of revenue and expenses during the reporting (fiscal) period. It is thus used to determine a company’s financial health based on its ability to fulfil its debt obligations and operating expenses and in valuing a company. Accrual basis accounting and cash accounting are two methods used to prepare cash flow statements. With accrual basis accounting, income is recorded when it enters the company accounts, and expenses are recorded when it leaves the company accounts. The cash accounting method records money once cash is on hand. 

A negative cash flow is obtained when the final cash flow statement (CFS) figure is negative, implying that your business lost revenue during the specified reporting period. However, this may not always signify a crisis in the long term. For example, a start-up will have a negative cash flow in the early stages as it progresses to profitability. 

Conversely, a positive cash flow is obtained when the final figure on the CFS is positive, meaning your business registered more cash inflows than outflows. However, a positive cash flow is also not always a good thing. This is because money can be obtained from liabilities such as loans.

The reader will learn the following essentials through this article:

• The main components of a cash flow statement include operating, financing, and investing activities.
• The importance of a CFS to any business.
• How the CFS complements the other key financial documents, such as income statement and balance sheet.
• The methods used to calculate cash flow in a business include direct and indirect methods.
• How the statement summarizes the cash and cash equivalent inflows and outflows and illustrates how well the company generates money.
• The utilization of CFS in a company’s cash management.

You can use a pre-made template to prepare a cash flow statement. Consistent use of these documents allows you to have standardized CFSs, which promotes more accurate documentation of cash flows in your business. These templates also ensure your cash flow statements have a professional outlook. They simplify the analysis and interpretation of cash flows which fosters more innovative investment planning as cash returns of various investments can be projected.

You can obtain such templates from below. They are free, readily downloadable, and easily customized to suit your business needs:

How is a Cash Flow Statement Used, and Why? 

It can be a great starting point for being more organized with your finances, as it provides a comprehensive overview and analysis of your financial health. It allows a business to identify whether it manages its spending effectively, facilitates efficient use of resources, better risk management practices, and improves decision-making processes when investing. This is because you can see where revenue is generated, how money is being spent, and how much is available for the business’s financial needs. 

A cash flow statement can be applied in many areas of accounting in any business. However, a business may commonly use the CFS for the following reasons:

Provides liquidity

You can use the CFS to determine how much money is required and available for your business’s short, medium, and long-term objectives. The money readily available for short-term objectives such as operations is your liquidity. 

Shows your assets, liabilities, and equity

Assets, liabilities, and equity are critical metrics for measuring a business’s financial health. They are also used to measure performance. These metrics can be determined by analysing the cash inflows, outflows, and held cash.

Predicts your future cash flows

You can use the CFS to forecast how much cash you expect to receive and how much you will spend in the future. You can then compare your forecasted figures with actual results to determine if there is any deviation from your plan and take corrective measures before it is too late.

Cash Flow Statement Vs. Income Statement Vs. Balance Sheet 

A cash flow statement shows a business’s revenue streams and sources of expenses within a specified period. This information is obtained from the net earnings from the income statement. However, the net earnings only cover the operating activities component of a CFS and not the financial or investing activities. As such, it cannot be manipulated by the non-cash transactions as it represents the actual flows and does not account for future cash inflows and outflows.

An income statement is an overview of the profit and loss of a business during a specific period, which are calculated from the gross revenue and expenses. An income statement will thus include depreciation as an expense. However, depreciation is not an actual cash outflow but an estimation of an asset’s value based on its useful life. This value depends on the depreciation method used and thus can be manipulated. As such, an income statement can be manipulated, unlike a CFS.

Conversely, a balance sheet summarizes your company’s assets, liabilities, and equity. Therefore, a CFS will always directly impact the income statement and balance sheet. This is because the net cash flow on the CFS should be equal to the net change in the different categories of the balance sheet.

However, this should be exclusive of:

• The CCEs (cash and cash equivalents) 
• Non-cash accounts such as accumulated depreciation and amortization

The critical components of a cash flow statement are operating, investing, and financing activities. However, other items are included to have a clear overview of the company’s financial position.

The following are some essential components of a CFS:

Starting balance

The CFS should have a starting balance. The starting balance is the cash and cash equivalents reported at the beginning of a fiscal period. The starting balance is necessary when using the indirect method to compute cash flows from operating activities. This figure is not needed when using the direct method. The starting balance can be obtained from the income statement of the same fiscal period.

Operating activities 

A business must spend or invest money to make profits. This section captures the inflow and outflow of cash from operations (business operations). This is typically money generated from products or services.

The operating activities’ components include:

• Income tax payments
• Interest payments
• Rent payments
• Receipts from the sales of goods and services
• Salaries and wages paid to employees
• Cost of goods/products and services used in production
• Other operating expenses
• Receipts from the sale of loans (for investment companies or trading portfolios)
• Equity instruments
• Debt, as they are business activities in this industry.

Investing activities 

Businesses make investments from time to time. To invest for the future, a business may purchase investments or property or implement any other action with long-term benefits. Types of investing activities include acquisition or disposition/sale of assets (equipment and property), payments paid for M&A (mergers and acquisitions), and loans made to vendors or received from customers. The changes in cash issued from investing are reported as cash-out items. However, cash gained from divesting is reported as cash-in and is used to calculate cash flows from investing.

Financing activities 

Financing activities are actions the business takes to acquire funding for different financial needs. Financing focus on cash from investors and bank and dividend distribution to stakeholders. Examples of financing activities include payments for stock repurchases, bonds, repayment of debt principal (loans), and dividends. Cash-in represents capital raised, and cash-out represents dividends.

Another example is the issuing of bonds. Through issuing bonds, a company generates cash. When a company pays interest to bondholders, the company incurs a cash-out expense resulting in a reduction of cash. However, this reduction is not calculated as a financing activity but rather an operating activity.

Disclosure of non-cash activities 

The CFS can include disclosure of non-cash activities. This disclosure is included when the cash flow statement is prepared in compliance with GAAP (generally accepted accounting principles). This disclosure is input as a footnote on the document. Examples of non-cash activities include depreciation, amortization, mortgage, etc.

Ending balance

The ending balance is the net change in cash inflows and outflows for the reporting period. This figure is the sum of all cash flows derived from operating, financing, and investing activities. The ending balance will represent the company’s total cash gained or lost in the specific period. This figure can be positive or negative cash flow.

Note: Cash flow statement cannot be referenced to determine a conclusive deduction of a company’s financial position. This is because; a negative cash flow does not always imply an unhealthy financial position. For example, a negative cash flow can result from a significant investment, such as expansion which may be rewarding in the future. Also, it must be used with other financial documents (income statement and balance sheet) to depict the company’s financial position accurately.

Two primary methods of preparing a cash flow statement are direct and indirect. However, these methods differ, as discussed below:

Direct cash flow method

This is a cash-basis accounting method. It sums up all cash payments (payments made to suppliers and salaries) and customer receipts. Alternatively, these cash flows can also be calculated using the beginning and ending balances of the various asset and liability accounts. This is supplemented by analysing the net decrease or increase in the asset and liability accounts.

Indirect cash flow method

The indirect method uses the differences resulting from non-cash transactions, such as changes in a company’s assets and liabilities from one period to the next, to determine a company’s cash flows. These differences can either be added or subtracted from the net income.

For example, changes in accounts receivable can be represented as follows. If an increase is registered in cash flow (more customers buy using credit), the increase is subtracted from net earnings as it is not cash, even though it is an increase in revenue. Conversely, if a decrease is reported, it is added to the net income. In addition, this method can calculate other activities, including inventory, taxes payable, prepaid insurance, and salaries.

These methods will often be solely on your discretion and preference, as none is superior to the other. However, the indirect method allows you to identify ways the items (increases or decreases resulting from non-cash transactions) on the balance sheet influence the net earnings in your income statement. This gives you a better understanding and analysis of the financial statements.