Cash Flow 101: Building a Cash Flow Statement
If you’re putting together a business plan for a loan or investment, your cash flow statement is one of three must-have statements that your plan needs. Not only will investors want to see how cash is moving into and out of your business, but your cash flow statement will help you understand exactly how much cash you need to raise and when you’re going to need it.
Cash flow statements aren’t just for investors, though. More importantly, your cash flow statement is crucial for running your business well. It is one of the best ways to get ahead of cash flow issues before they threaten your long term viability. Regularly reviewing or analyzing your cash flow statement will show you when in the future you might be at risk of running low on cash so you can plan ahead and get a line of credit, loan, or other financing before you’re in the midst of a cash crunch.
1. Operating activities
How does your business make money on a day-to-day basis? Your organization’s operating activities include everything that relates to how you generate revenue.
Most basically, cash inflows are generated whenever customers buy your products or services; outflows occur when you pay employees, suppliers, taxes or interest, among other things.
2. Investing activities
Most transactions relating to the sale or purchase of property, equipment, or other non-current assets are included in your investing activities, as are any expenses tied up in mergers or acquisitions.
If your business plays in the stock market at all, you’ll also have to indicate when you buy or sell securities here as well.
3. Financing activities
This section of the cash flow statement includes information about taking out loans to buy property or equipment; issuing stock to employees, the public, or other stakeholders; paying out dividends, and so on.