If you do your own bookkeeping in Excel, you can calculate cash flow statements each month based on the information on your income statements and balance sheets. Positive cash flow isn’t always positive overall. While it gives you more liquidity now, there are negative reasons you may have that money-for instance, by taking on a large loan to bail out your failing business. Keep in mind, positive cash flow isn’t always a good thing in the long term. When you have a positive number at the bottom of your statement, you’ve got positive cash flow for the month. For example, early stage businesses need to track their burn rate as they try to become profitable. It’s important to remember that long-term, negative cash flow isn’t always a bad thing. When your cash flow statement shows a negative number at the bottom, that means you lost cash during the accounting period-you have negative cash flow. On top of that, if you plan on securing a loan or line of credit, you’ll need up-to-date cash flow statements to apply. That’s important for making long-term business plans. You can use cash flow statements to create cash flow projections, so you can plan for how much liquidity your business will have in the future. Together, they form the accounting equation that lets you measure your performance. Those three categories are the core of your business accounting. They show you changes in assets, liabilities, and equity in the forms of cash outflows, cash inflows, and cash being held. So you know what you can afford, and what you can’t. That means you know exactly how much operating cash flow you have in case you need to use it. So long as you use accrual accounting, cash flow statements are an essential part of financial analysis for three reasons:

The cash flow statement takes that monthly expense and reverses it-so you see how much cash you have on hand in reality, not how much you’ve spent in theory.

But cash isn’t literally leaving your bank account every month. However, you’ve already paid cash for the asset you’re depreciating you record it on a monthly basis in order to see how much it costs you to have the asset each month over the course of its useful life. The cash flow statement makes adjustments to the information recorded on your income statement, so you see your net cash flow-the precise amount of cash you have on hand for that time period.įor example, depreciation is recorded as a monthly expense. So, even if you see income reported on your income statement, you may not have the cash from that income on hand. (The cash accounting method only records money once you have it on hand. If you use accrual basis accounting, income and expenses are recorded when they are earned or incurred-not when the money actually leaves or enters your bank accounts. While income statements are excellent for showing you how much money you’ve spent and earned, they don’t necessarily tell you how much cash you have on hand for a specific period of time. A cash flow statement is a regular financial statement telling you how much cash you have on hand for a specific period.

Cash flow indirect method format