The sufficiency of cash and the ability to make payments (liquidity) are fundamental issues in a company’s management of finances. For this reason, entrepreneurs should regularly monitor their company’s cash flow. Cash flow means payments to and from a company’s bank account or cash.
A cash flow statement is an excellent tool for maintaining the company’s liquidity. It helps you understand your company’s running costs and prepare for upcoming costs.
The company must have sufficient funds for the actual running of its business and for any loan repayments and future investments. A common reason for problems is the inability to forecast the company’s cash flow and to take proactive measures based on those forecasts.
This is how you make a cash flow statement – make use of our model
A cash flow statement is made on a monthly basis, and it is advisable to use our cash flow statement example and Excel template to make it. The entrepreneur should estimate the company’s sales-based internal financing and expenses as realistically as possible. The company will incur running costs right from the beginning of operations, whereas initial sales are not always as high as the entrepreneur had hoped.
The cash flow statement is an estimate of the following:
- Sales and other income
- This takes account of the executed orders already invoiced, in order words the agreed orders that will be recognised as income at a later date and offers whose fulfilment is not yet certain.
- Running costs, such as labour costs, taxes and insurance premiums and costs for facilities
- Financial income, such as loans
- Costs of financing (if any)
That’s why cash flow monitoring is important
The cash flow statement is an important tool and helps to see when the cash flows out and when additional financing is needed. A profitable company can also run low on cash. For example, business growth requires capital, which is then unavailable for other purposes. Similarly, a seasonal business may, for example, generate income during a specific time of the year, whereas fixed costs are incurred more evenly throughout the year.
A cash flow statement is also useful tool for a company that needs more working capital. The role of cash flow is particularly emphasised if the company makes larger investments or has a lot of accounts receivable or wages and salaries to pay.
If you apply for a loan for your company, the bank or another external lender is interested in the cash flow statement.
