2.3 Cash flow statement

The final set of financial statements are projected cash flows. A cash flow statement is usually prepared last because it includes data from its corresponding profit and loss statement and balance sheet (Barringer, 2015).

Both statements provide vital management information, but neither tells us anything about how much money is flowing in and out of the business.

(Blundel et al., 2017, p. 185–86)

The Financial Statements Explained in One Minute video illustrated that producing, analysing and interpreting cash flow is important for assessing the credibility of your profit and loss statement. But what exactly does this mean?

The basic idea behind a cash flow statement is to start with a beginning balance, like the amount of cash you have on hand at the beginning of a month; add your projected monthly income (or loss); and then list all the other transactions that either add or subtract from your cash.

(Barringer, 2015, p. 246)

Typically, your cash flow statement (Table 4) should be divided into the balance brought forward from the previous period, the income that your business generates, the expenditure that you have for running your business, and the resulting balance that is carried forward to the next period.

Table 4 Example cash flow statement

Week no. 1 2 3 4 5 6 7 8
Balance brought forward
Income
Expenditure
Balance carried forward

Activity 4 will help you to prepare a cash flow statement for your own venture.

Activity 4 Preparing a cash flow statement

Timing: Allow approximately 15 minutes to do this activity

Produce a cash flow statement for your start-up, using the example in Table 4 as a guide.

Reflect on the numbers that you see and think carefully about whether your venture will be able to maintain a sufficient cash balance to run successfully.

Discussion

Did you find this exercise easy or difficult to do? Are there still elements of the cash flow statement that you don’t fully understand?

If so, you might reflect on the reasons for this. It is possible that you cannot easily forecast any inflows and outflows of money. Making predictions about future sales, for example, requires some market research and a good understanding of the customers that you aim to serve.

Similarly, you might not be fully aware yet of the expenditure that you will have to cover. For example, there may be an unexpected increase in the rent for your warehouse or you may not have fully considered the insurances that you might need for running your business.

3 Alternative sources of funding