8 Steps to Create an Excellent and Effective Cash Flow Statement for Startup Companies
Are you currently scratching your head over the idea of creating a cash flow statement for startup companies? You’re not alone. Cash flow statements can be a little complex, but they certainly aren’t impossible to create.
A cash flow statement, or CFS, is a financial statement that accurately summarizes the total amount of cash that goes into and eventually leaves a startup business. Cash flow statements are designed to accurately measure if a startup is managing its cash wisely. This is mostly used by business owners to prove to investors or grant bodies that they are using their funding to pay off debts, operate the company, and grow the company. Generally, a cash flow statement will be provided by debtors to relevant parties alongside a balance sheet or an income statement. The U.K. government also requires the ongoing creation of cash flow statements for tax and legal purposes.
So how can one write an accurate and reliable cash flow statement? In this brief guide, we’ll explore how cash flow statements work and every step involved in writing one yourself.
Cash flow statements are very important, and it is vital to create them properly and accurately. Follow these steps to get your cash flow statement ready to go.
Understand How Cash Flow Statements are Split Up
Before you begin to design your cash flow statement for startup companies, you’ll need to understand how the cash flow statement works and the various parts of it. The general cash flow statement will be broken up into three different cash flows-- operating, investing, financing, and the end result of those activities.
- Operating Activities - Involves things like payroll, reimbursement liability, etc.
- Investing Activities - Involves things like equipment or machinery purchases.
- Financing Activities - Involves things like preferred stock and investments.
- End Resolution - The end balance of cash after accounting for the above activities in a set period of time, usually monthly or yearly.
Gather the Right Data
This first step in creating a cash flow statement for startup companies is to gather your data and relevant documents. These usually include the following:
- Balance sheets.
- A statement of comprehensive income.
- A profit/loss statement.
- Documents that note equity changes.
- The previous period’s cash flow statement (if available).
- All information involved material purchases or transactions.
- A list of contracts that have been entered into through the relevant period.
- Information involving any possible legal action against your startup (if applicable).
- Documents that note any large purchases, exchanges, and anything else involving your fixed assets.
Calculate Any and All Changes Noted in the Balance Sheet
Set your opening and closing balance sheets and create three different columns. The first will be the title of the balance sheet, the second will be the balance of this specific section upon closing, and the third will be the balance of this specific section upon opening. Each loss or gain will be listed under each column and added up at the end. This makes it easy to see how cash has moved and changed from the start of a spending period to the end of a spending period. The changes and additions in each column will result in your total assets and total liabilities for the noted period.
Move the Balance Sheet Changes Over to Your Cash Flow Statement
Use your previous period’s statement of cash flows to use as a base for your current cash flow statement, and also to copy over the titles of each caption. It’s more likely than not that your will still be dealing with the same cost items in the current period. If not, you can easily insert some lines with new costs or earnings.
For each change in cost, you will insert a row for each individual item as the difference. For example: Let’s say that your cash and cash equivalents of your assets was $125,000 last month and is 90,000 this month. Your cash flow statement row for assets will be -$35,000.
Adjust for Non-Cash Items
Using your statement of total comprehensive income and the other documents noted in the first step, find out where non-cash transactions took place. There are many non-cash transactions that happen in a startup on a regular basis, including:
- Expenses for depreciation
- Interest expenses and income
- Tax expenses
- Expenses involving recognition and income involving derecognition of older provisions
- Notable changes in reserves
- Foreign exchange differences
- Barter interactions
For each non-cash transaction you find, adjust the balance in the cash flow statement. Each adjustment should be in its own column.
Add Your Adjustments Up
Once your adjustments are entered and your totals are verified as zero, it’s time to finish up your cash flow statement. This is where we will create a fifth column, which will serve as the actual cash flow statement. In each item section, make horizontal or line totals. To do this, add up the numbers you have in columns two through four. The end result is the cash in the valance sheet for the section, adjusted by the inclusion of your non-cash items. This will give you an appropriate and accurate cash movement for those specific items.
Perform a Final Re-Check of the Document for Accuracy
This is a very important step. We’re dealing with a lot of math here. Depending on your sheer volume of assets and expenses, you may be dealing with a lot of points of reference, too. Make sure that all of the numbers are accurate and make sense. It may be a good idea to work with another individual, such as a financial advisor, to ensure the accuracy of your cash flow statement.
Utilise Industry Leading Software and a Rockstar team
If taking on the task of writing a strong cash flow statement is a bit too out of your reach, one great alternative is to seek the help of a professional. Accountancy Cloud can help.
Accountancy Cloud is an online accounting and CFO services firm dedicated to helping startup businesses and entrepreneurs get the best out of their finances. In addition to consulting and bookkeeping services, Accountancy Cloud also can help develop cash flow statements for virtually any type of business. When you’re ready to put your business’s cash flow statement and other financial needs in the hands of trained and experienced professionals, get in touch with the Accountancy Cloud’s team of talented accountants for more information on their leading technology.
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Frequently Asked Questions
Why is a cash flow statement important?
A cash flow statement is used to accurately measure the overall cash position of a startup, including where the money goes and when it is put into the business. Not only are these statements useful for business owners who want to keep an eye on the availability of their money, but it is also a legal requirement when owning a business with only a few exceptions.
Why do I need a cash flow statement?
Whether you are a startup business or an NFP organization (with very few exceptions, though there are some) you are legally obligated to provide a cash flow statement annually that notes your startup’s operating cash flows, financing cash flows and investing cash flows. A cash flow statement is necessary for business owners to ensure that they are not overspending and are spending cash in the right places, such as to pay off debts.
How to read a cash flow statement?
The purpose of a cash flow statement is to provide some insight into your company’s financial health and status. As such, it’s important to actually be able to reference and read it once complete.
A cash flow statement will divide activities up into different aspects of the company, such as operating activities, financing activities, etc. In each of these activity sections, the net income of the company for this section will be at the top and will be followed by added adjustment and negative balances for different things, such as payroll liability, equipment costs, etc. The end of the section will note the net cash provided by the activities, the net cash increase for the period noted, the cash that was in place at the start of the period, and the cash left remaining at the end of the period.
What does cash flow statement mean?
A cash flow statement is a list of where cash in a business comes from and where it goes throughout the year. Essentially, every transaction that takes place in your business will be adjusted by the total value of non-cash items, resulting in a clear look into your cash movement.