It seems pretty obvious that cash is a big factor in your current and future business plans. From startup and everyday operating costs to growth and expansion costs, cash is the lifeblood of a business. Large corporate organizations and small business alike are required to make decisions about where and when to spend (or not to spend) money. To do this, it’s imperative that you monitor what is commonly referred to as “cash flow.”

So what is cash flow? To put it simply, cash flow is the journey of financial assets into and out of your business. Things like the sale of items and services, lines of credit, loans, or the sale of any assets can all be considered an “inflow” of cash. Business expenditures (payroll, utilities, mortgage or rental fees), business purchases (equipment, supplies), or loan repayments can all be considered “outflow.”

Sounds easy enough, right? While the concept is, in fact, one that’s fairly straightforward, how to make sense of it and create short and long term strategies form it can often seem daunting. This is especially true for new or struggling small business owners who are often strapped for finances, and therefore, need to make the most of their cash flow.

For that reason it’s imperative that you create a cash flow statement to help you gather information about revenue and expenses over a period of time. A cash flow statement is likely to be one of the most important documents with regards to your business. By preparing a cash flow statement, or cash flow analysis, you will be able to keep tabs on your finances and effectively plan for the next quarter or year to come.

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Creating a Cash Flow Statement

If you understand the basic principles of balancing a checkbook, you’ll probably understand some of the basic principles behind developing a cash flow statement. Ideally, you will be looking at the change in cash (actual cash or cash equivalents) over a specific period of time.

One of the primary reasons to create a cash flow statement is to gain insight about your spending and expenses by documenting and keeping a history of cash flow on a monthly or quarterly basis. To do this, you will need to include cash flow analysis regarding the following information:

• Cash Flow from Operations

  Much like the title suggests, this part of a cash flow analysis comes from the regular ebb and flow of your business and focuses on the net income (revenue minus the costs of goods, expenses, taxes, etc.). Also included in this portion of your cash flow analysis should be non-cash expenses such as depreciation, adjustments made for losses or gains, and changes in all of your current assets and liabilities. Consider operations cash flow as the money that is generated internally.

• Cash Flow from Financing

  The financial portion of your cash flow statement includes items like loan or credit line obligations (repayment from borrowing money), issuing or buying back stock, and any cash dividends. Eventually, your cash flow analysis will help you determine the impact (positive or negative) of your financial actions. This will help you make more informed decisions in the months, quarters, and years to come.

• Cash Flow from Investing

  In many ways, your business is one giant investment, but in this particular case, we’re referring to non-current assets. These are assets that will add value to your company over time, but during the current cash flow statement, their value can’t be fully realized.

  When you think about what to include in the investment cash flow portion of your statement, consider things like marketing and brand recognition expenses, purchases of equipment or intellectual property, or any goodwill efforts you’ve made.

By including the three breakdowns above, you’ll be able to create a complete picture of your financial standings. Regular cash flow analysis is a vital part of staying in touch with your business and determining your next course of action.