Startup Accounting – Creating Your Cash Flow Statement

Your cash flow statement based on your other statements. The three statements are related to each other.

The first section of your cash flow statement is cash flow from operations. Cash flow from operations shows the cash flowing in or out of your business based on your operations.

The first line of your cash flow from operations should be net income after taxes and interest, but before dividends. The second line should be the depreciation that is deducted from your income statement.

Following these two lines should be changes in your assets (other than property, plant, and equipment), followed by changes in your liabilities from period to period; Both items come from your balance sheet and can be broken down line by line as shown on your balance sheet.

The equation to obtain the cash flow from operations is:

cash flow from operations = net income + depreciation – change in assets + change in liabilities

Think about how your cash comes into your business: if the value of your assets increases, you will have less cash. For example, if your accounts receivable increase, you were expecting to receive cash from the income you generated, but you don’t have the cash yet.

On the liability side, if you could delay paying vendors for longer periods of time, then you would have more cash in your bank account.

The next section of the statement of cash flows is the cash flow from the investment. In general, this is money that you have invested in plant, property, and equipment. This section would also include investment in subsidiaries or other areas of capital. If I sold any of these, it would also be listed here.

The next section is the cash flow from the financing. Financing includes equity investments, loans and other debt, any share repurchases, and any dividends paid.

To get the cash flow for this particular period, you would take the cash flow from operations, subtract the cash flow from investing, and add the cash flow from financing. Some accountants put a negative number in the investing section cash flow and therefore add all three sections together to get the cash generated (or lost) for the current period.

Add the cash generated for the current period to the cash at the beginning of the period to get the cash at the end of the period. This number will be entered on the cash line of the statement.

I’ve included a set of example statements that will show you how all the statements are put together. Visit my blog, CFO Yourself, to download the sample Excel spreadsheet. Keep in mind that cash is decreasing even though income is increasing. This is because, in this example, the debt is paid off faster than the company generates revenue. Basically, at the beginning of the year, this company swaps debt for an equity investment.