A cash flow statement is a report that shows the transfer of cash in and out of a business. It is used by business owners to determine the liquidity of a company. As one of the financial statements required when running a business, this document often causes entrepreneurs a lot of headaches and stress, mainly because it is prepared on a cash basis and not on an accrual basis. Another reason is that it may be quite demanding to adjust accounting records to exclude non-cash items.

This statement is comprised of three sections:

  • Operating Activities
  • Investing Activities
  • Financing Activities

The most commonly used format is the indirect method, while the other method is the direct method.

Here’s an example of how to create a cash flow statement using the Direct Method:

Start by gathering financial information, which you’ll find on your balance sheet and income statement for the current accounting period.

“Operating Activities” is the first section and comprises of all the cash the company raised through its main operations. Total the net inflows and outflows from operating activities.

You will then determine cash flows from investing activities. Proceeds from the sale of assets can be added here. Any assets purchased with cash and are being held, as well as any stock purchases should be subtracted.

The third section is titled “Cash Flow from Financing activities”. Add cash received through the issuance of stock or any capital contributed by owners or partners of the business.  Subtract any cash paid out to pay long-term debts and cash paid to shareholders as dividends.

Complete the cash flow statement by including the cash balance from the most recent accounting period. Fill in the seven line items and any supplemental information.

Despite the fact that it can be intimidating for many business owners, creating a cash flow statement can be a relatively simple process.