Section A: Intro to Cash Flow Statements

A detailed step-by-step explanation of preparing a cash flow statement from raw financial dat

Step 1: Start with Net Income Pull this from your income statement. This figure is your starting point for determining cash from operations.

Step 2: Adjust for Non-Cash Expenses and add back:

• Depreciation and amortization
• Losses from asset sales

These reduce accounting profit but don’t use actual cash.

Step 3: Adjust for Changes in Working Capital

This includes:

• Accounts Receivable: If AR increases, subtract it (you earned it but haven’t been paid).
• Inventory: An increase = cash spent stocking up, so subtract it.
• Accounts Payable: An increase = you haven’t paid yet, so add it.

These adjustments help reflect the actual cash coming in and going out of operations.

Step 4: Add/Subtract Investing Activities

This part includes:

• Cash spent buying property, equipment, or other long-term assets (cash outflow).
• Cash received from selling these items (inflow).

Step 5: Add/Subtract Financing Activities

Here, show how money moves due to borrowing or investment:

• Cash inflows: Taking out loans, issuing shares.
• Cash outflows: Repaying loans, paying dividends, or owner withdrawals.

Step 6: Reconcile the Net Cash Movement

Add together:

• Net cash from operating activities
• Net cash from investing activities
• Net cash from financing activities

Then, add this total to the opening cash balance to calculate the ending cash balance—which appears on the balance sheet.

Examples of cash flow problems small businesses may experience despite profitability

Delayed Customer Payments

Example: A graphic design firm might invoice $30,000 in a month (appears profitable), but if clients take 90 days to pay, there’s no cash to pay rent or salaries now.

Overstocking Inventory

Example: A small furniture store spends $20,000 on stock for a seasonal rush. It shows a profit on paper when it sells, but until then, their cash is tied up in unsold couches.

High Capital Expenditures

Example: A café might make a healthy profit, but if they spend $15,000 on a new espresso machine, their cash account could dip dangerously low.

Heavy Loan Repayments

Even with solid revenue, repaying a big loan can drain monthly cash. Profit doesn’t help much if the business is cash-poor when payments are due.

Rapid Expansion

Scaling too fast—opening a second location, hiring staff, investing in marketing—can overextend resources before new revenue kicks in.

Cash flow forecasting and why should it be done

Cash flow forecasting is the process of estimating how much cash a business will receive and spend over a future period – often 3, 6, or 12 months. It predicts when money will come in (from sales, loans, etc.) and when it will go out (bills, payroll, rent).

• Why should it be done?
• Helps you plan for shortfalls or surpluses
• Ensures you can meet payroll, pay suppliers, and cover rent
• Supports smarter decision-making (e.g., timing a new hire or equipment purchase)
• Aids in securing loans or investor confidence
• Prevents surprises—especially during seasonal sales dips or growth spurts

What basic tools or methods can be used for 3–6 month cash flow planning? 

Simple Spreadsheet Model (e.g., Excel or Google Sheets)

Great for small businesses.

Lay out:

• Cash inflows (expected sales, receivables, loans)
• Cash outflows (fixed + variable costs)
• Columns for each week or month
• A running cash balance

Rolling Forecast

Update your forecast monthly by dropping the past month and adding a new one. This keeps it fresh and responsive to real performance shifts.

Dedicated Software Tools

Options like Float, Pulse, or QuickBooks Cash Flow Planner integrate with accounting systems and automate the forecast based on real-time data. Great for businesses with more complex needs.

Scenario Planning

Plan for best case, expected case, and worst case. This builds agility into your forecast and boosts confidence when navigating uncertainty.

What are the biggest risks of not forecasting cash flow?

1. Running Out of Cash Unexpectedly: Even profitable businesses can go broke if they don’t spot upcoming dry spells.
2. Poor Timing of Big Decisions: Hiring staff, buying equipment, or launching a new product without knowing if cash will support it.
3. Strained Supplier & Customer Relationships: Missing payments damages trust, possibly affecting credit terms or losing key accounts.
4. Limited Access to Funding: Lenders and investors often require a solid forecast. Without one, funding options shrink.
5. Missed Opportunities: Without knowing your surplus, you may hesitate to jump on a discount purchase or marketing chance.