A cash flow statement provides valuable information about a company’s gross payments. It’s compiled by using data from a balance sheet and income statement.

Using a cash flow statement gives you the ability to manage and forecast your working capital needs. It’s based on cash receipts and payments between two consecutive balance sheets.

Cash coming in is shown as positive amounts while cash going out is shown as negative.

All figures entered on the statement are actual cash.

How to create a cash flow statement

Operating activities

This section of the cash flow statement converts items reported on the income statement. It includes revenue from selling products, as well as cash receipts. This represents the key source of an organisation’s cash generation. It is considered the most important information on a cash flow statement

Investing activities

This reports the purchase and sale of long term investments and property, plant and equipment. It also includes the sale of business assets other than inventory. This section records changes in equipment, assets or investments.  A well-performing company has investments in plant, equipment, land and other fixed assets.

Financing activities

The Financing activities section of the cash flow statement reports on the payment of dividends and issuance as well as the repurchase of the company’s bonds. Money that has been borrowed by the business is also reflected here. This represents changes in debt, loans, stock options and long-term borrowings etc. It shows how borrowing affects cash flow.

There are two methods for creating a cash flow statement, namely

Direct and Indirect method

The direct method subtracts money spent from money received, while the indirect method starts with net income and factors in depreciation.

When you create a cash flow statement, keep in mind that a company in good shape is one that is bringing in more than what it’s spending. The most important thing to consider however, is the company’s cash flow trend.

Cash provided by operating activities should be consistently greater than net income over a period of time.