Reading the statements

Where the money actually went.

A cash flow statement answers one question. Your bank balance moved over the year, and this page says why. It's the only statement written in cash, so it's the one that explains a year that looked fine on paper and still felt tight.

Build this page from your own numbers, or read the worked example first.

Here's a full year for a small company that started trading in January. It's the same company as the one in how to read a balance sheet. The last line here is the cash at the top of that sheet.

A figure in parentheses is cash leaving. This company lost money on paper and still ended the year with $40,000 in the bank. The owner and the bank put that money in.

The three sections of a cash flow statement

Operating is the business itself. What customers paid you, less what you paid to serve them and keep the lights on. Over time this is the section that has to work.

Investing is what you bought that lasts longer than a year. Equipment, a fit-out, a vehicle. It also covers selling any of it again.

Financing is money from outside the business and money going back out. Owners putting cash in, a loan drawn or repaid, a dividend or a draw.

Why the page starts with a loss

Almost every small company presents this page the indirect way. You start with the profit or loss from the income statement. Then you undo everything in it that wasn't cash, and add the cash movements profit never sees.

Depreciation is the clearest one. It's a real cost of owning the equipment, but no money leaves the bank in the month you record it. So it goes back on.

What the working capital lines mean

The four lines in the middle are the gap between earning and being paid, and between owing and paying.

• Money customers owe us, ($18,000). You booked the sale and the cash hasn't arrived, so it comes off.
• Stock on the shelf, ($12,000). You paid for goods that haven't sold yet. The cash is gone and the profit isn't there yet.
• Suppliers we haven't paid, $14,000. The cost is in your profit and the money is still in your account, so it goes back on.
• Paid for work we owe, $9,000. A customer paid up front. You've got their cash and you still owe them the work.

Growing makes the first two bigger. That's why a company can sell more every month and feel poorer every month.

The line that matters

Cash from operations is the one to read first. It says whether the business paid for itself this year, before anyone put money in.

Here it's ($9,000), so it didn't. The owner and the bank covered the year. In a first year that's normal, and the question is when that line turns positive and stays there.

Build your own cash flow statement

The app builds this page month by month from what you type, alongside the other two, and tells you the month your cash sits lowest.

How it ties to the other two pages

The net loss at the top comes straight off the income statement. The cash at the bottom is the cash line at the top of the balance sheet, on the same date.

Those two ties are the test. If either one misses, something upstream is wrong, and you know it before anyone else reads the pages. How the three pages fit together covers the rest of the wiring.

Direct or indirect

The indirect method is the one above, starting at profit. The direct method lists cash received from customers and cash paid to suppliers and staff instead.

Both end at the same figure. Lenders and investors see the indirect version almost every time, so that's the one worth being able to read.

Profitable and still short

Profit says you earned more than you spent. Cash says the money is there. Slow-paying customers, stock bought early and a loan repayment can all sit between the two.

This page is history. A twelve month cash flow forecast does the same thing forward. It puts the low month in front of you while you can still act on it.

Build the three statements free

What the full model adds

• Every line above built month by month from your own assumptions, rather than typed in once.
• Receivables and payables worked out from the days you really collect and pay in, so the working capital lines move when the terms do.
• A loan split into interest on the income statement and principal down here, without you doing it by hand.
• The month your cash sits lowest across three years, which is the number the whole page is really for.

Building the model is free. Saving it to your account, the Excel workbook and the print pack are on a paid plan. The pricing page lists what comes with each one.