The cash flow statement is one of the sections of a business plan that people tend to experience the most difficulty with. Preparing a cash flow shouldn’t be that difficult as long as you follow a few simple steps.
If you are applying for a startup loan The Cash Flow Statement will be the only financial statement you will have to produce. You will not have a Profit & Loss Statement to work out your income and expenditure assumptions.
In this article, I’ll explain how to prepare an independent Cash Flow Statement.
A cash flow statement can be prepared in two ways, the direct method and the indirect method.
The direct method is a method of creating the cash flow statement in which actual cash flow information from the company’s operations is used to project cash flows
The indirect method for calculating cash flow from operations uses accrual accounting information and the P&L, it always begins with the net income value. The net income is then adjusted for changes in the assets and liabilities account of the balance sheet by adding to or subtracting from net income to derive the operating cash flow.
The indirect method can be very confusing for non-accountants so its best to stick to the direct method.
How To Prepare A Cashflow Statement Step By Step
A Cash Flow Statement is comprised of the following sections:
Step 1: Income
Predicting income can be difficult, but if you understand your marketing and sales plans, you should understand when you will make sales. Depending on your business type you need to work out when you get paid. Cash flow is tight for startups so it would be prudent to not have payment terms exceeding 30 days.
Your plan should include a detailed explanation of your start-up costs, cost of sales (costs to produce your goods/services), administrative costs and asset purchases. Rising costs hit many small businesses as they grow, if possible you should include a plan of how you will keep costs down using by procuring the best value goods and services.
Step 2: Variable costs
Variable costs are the costs that are incurred depending on your activity. You should try to structure your business model to have as much of your expenses to be variable and be dependent on sales. In order to make a profit, you have to ensure you have priced your goods or services to cover variable and fixed expenses. Think of all the costs you will incur in order to make sales, this could be temporary staff, equipment, food.
The second type of variable costs are costs that you can control depending on circumstances. For instance, marketing can be a variable cost as you may decide to increase your marketing spend on a special promotion like Christmas or reduce your marketing spend when business is slow.
Step 3: Fixed costs
Fixed costs are costs that will not change, and you have to pay for insurance, rent and rates. A strong argument can be made by utilities to be included as part of your fixed costs. The amount is variable, but you will have to pay for them throughout the year.
If you have permanent staff (including your own salary) you need to budget this within this section.
Step For: Things to consider
Seasonality – is your business seasonal, does it pick up or ramp down at any certain time in the year. Include this in your cash flow.
Taxation – depending on your legal structure of the business you will be obliged to pay income tax, whether personal or business from the business. It’s usually paid in lump sums and will be a large amount. Make sure you seek advice. Same goes with VAT which is paid quarterly.
Future Years – You will have to complete your cash flow for at least two years. Don’t be put off by this, make some broad assumptions about what how your business will be in the second year. For instance, if you want to grow year on year revenue by 20% include this in your cash flow. To achieve this growth you may need to increase staff, your marketing spend or buy additional equipment, make sure you add these costs into your second-year cash flow.
Preparing a cash flow statement should be an estimate of what you expect to spend and receive over a certain period of time. Look at your bank statements to work out trends. If you have no data to work from, be sure you are conservative with your income estimates and take into consideration some late payments and bad debts. On the expenditure side, always add in a contingency and emergency payments.
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