A cash flow statement shows the movement of cash coming into and going out of a business over a period. It helps an entrepreneur monitor the cash position so the business always has money to pay its obligations.
Inflows and outflows
- Cash inflows — money coming in, for example cash sales revenue, capital invested and loans.
- Cash outflows — money going out, for example buying stock, paying rent, wages and bills.
Basic calculation
The key concepts in a cash flow statement are:
- Net cash flow = total inflows − total outflows.
- Closing balance = opening balance + net cash flow.
Key idea
A positive net cash flow means money in exceeds money out (a surplus). A negative net cash flow means money out exceeds money in (a shortfall), which can cause trouble in paying obligations.
Example
A stall's opening cash balance is RM1,000. During the month, inflows are RM5,000 and outflows are RM4,200. Net cash flow is RM800, so the closing balance is RM1,000 + RM800 = RM1,800.
A cash flow statement is usually prepared every month so that an entrepreneur can plan ahead. If the forecast shows a shortfall in a particular month, the business can act by speeding up collections from debtors, delaying non-urgent purchases, or arranging temporary financing. By monitoring cash flow continuously, a business can avoid running out of money even when it records a profit on paper.
Cash flow is different from profit. A business can record a profit yet be short of cash if sales are made on credit. That is why a cash flow statement is important for managing liquidity and avoiding financial trouble.