Startup Accounting – Creating Your Cash Flow Statement
Your statement of cash flows based on your other statements. The three statements are related to each other.
The first section of your cash flow statement is cash flow from operations. Cash flow from operations shows cash flowing in or out of your business based on your operations.
The first line of your cash flow from operations should be net income after taxes and interest, but before dividends. The second line should be the depreciation that is deducted from your income statement.
After these two lines should be the changes in your assets (other than property, plant and equipment), followed by the changes in your liabilities from one period to another; both items come from your balance sheet and can be broken down line-by-line as shown on your balance sheet.
The equation to obtain cash flow from operations is:
cash flow from operations = net income + depreciation – change in assets + change in liabilities
Think about how your cash is coming into your business: if the value of your assets increases, you will have less cash. For example, if your accounts receivable increases, you were expecting to receive cash from the income you’ve generated, but you don’t have the cash yet.
On the liability side, if you could delay paying vendors for longer periods of time, then you would have more cash in your bank account.
The next section of the cash flow statement is the cash flow from investing. In general, this is the money you have invested in plant, property and equipment. This section would also include investment in subsidiaries or other areas of capital. If I were to sell any of these, it would also show up here.
The next section is the financing cash flow. Financing includes equity investments, loans and other debt, any share repurchases and any dividends paid.
To get the cash flow for this particular period, you would take the cash flow from operations, subtract the cash flow from investing, and add the cash flow from financing. Some accountants put a negative number in the cash flow investing section and thus add all three sections together to get the cash generated (or lost) for the current period.
Add the cash generated for the current period to the cash at the beginning of the period to get the cash at the end of the period. This number will be entered on the cash line of the statement.
I have included a set of example declarations that will show you how all the declarations come together. Visit my blog, CFO Yourself, to download the sample Excel spreadsheet. Note that cash is going down even though revenue is going up. This is because, in this example, the debt is being paid off faster than the business is generating revenue. Basically, at the beginning of the year, this company exchanges debt for an equity investment.