Cash flow is the money that comes into and goes out of your business. It is often called the lifeblood of your business. A study by the US Bank found that 82 percent of businesses that fail do so because of how they handle their cash flow. So, making cash flow statements every month could help your business keep from running out of money. Remember that the money that comes in and goes out of your business does not always equal the money that comes in and goes out.
There are five parts to a basic cash flow statement:
- Cash Balance at the Start of the Month: This section shows how much cash is in the bank and on hand at the start of the month. Your starting cash balance is $1200 if you have $800 in your checking account and $400 in cash.
- Cash In: All the activities that bring money into your business, like sales and payments (cash payments for old debts). If you made $1000 from sales and $400 from people who paid off old debts, your total "Cash In" is $1400.
Cash Out: This section lists all of the costs that take money out of your business. Cash used to pay rent, salaries, supplies, loans, taxes, and other bills is often listed under this section. Your "Cash Out" would be $1900 if you spent $700 on rent, $200 on supplies, and $1000 on salaries.
- The "Net Change" is found by subtracting the total amount of "Cash Out" from the total amount of "Cash In" (the 2nd section). In our example, your net change is: $1400 - $1900 = -$500. Keep in mind that your business can grow as long as it has a positive cash flow.
- Ending Cash Balance: Add "Net Change" (section 4) and "Beginning Cash Balance" (section 1) to get the "Ending Cash Balance." The "Cash Balance at the End of the Period" becomes the "Cash Balance at the Start of the Next Period."
Tip: If "Net Change" is negative, it means that you spent more than you made. If this is the case, you should cut some expenses so you don't use up all the cash in your business. Learn more about how to fix a negative "Net Change" in our next article.
