Working With The Cash Flow Statement
The best way to become familiar with the cash flow statement is to jump right in with an example. In practice, your organization should be using your accounting software to generate cash flow statements, but in order to better understand them we have created an example manually.
We'll use the company NewStar Energy for our example. There is an Excel file attached at the bottom of this section. Please download this file so that you can follow along. This example shows a full cash flow statement that incorporates both cash inflows and various categories of cash outflows.
Like many energy companies, NewStar's business is very cyclical and sales fluctuate significantly throughout the year. This makes it more difficult to manage cash flow and ensure the business has sufficient cash on hand to sustain the business.
You can see that the company starts off with a $20,000 cash balance (Cell C5) . The company takes in $62,000 in cash collections (Cell C7) which gives them a total cash balance of $82,000. The sum of the cash outflows for the first month is $74,360 (Cell C41). This means that the business still has positive cash flow, but their cash reserves are shrinking. This is because their cash collections (Cell C7) are less than their outflows (Cell C 41). This leaves them with a cash balance of $8040.
This pattern continues through May and June, and leads to a negative cash balance. This is because the company's sales tend to be lower during months with mild temperatures. This is a problem for NewStar. Without cash on hand, rent and salaries cannot be paid. The business would likely shut down.
However if we continue to project cash flows for subsequent months, in July, NewStar's cash collections exceed their cash outflows. The hotter months create more demand for their product and the negative trend reverses. Both July and August's cash inflows exceed the outflows and in August the company's total cash balance is positive.
It appears the ultimately, NewStar has a viable business, but simply encountered some short term cash flow problems.
Projecting these cash flows on a cash flow statement and taking the proper actions ahead of time could have prevented this negative cash flow problem.
In your worksheet change the $20,000 figure in Cell C5 to $50,000. This is the equivalent of acquiring a $30,000 loan. This loan solves the cash flow problem and allows NewStar to achieve positive cash flows throughout the year.
Positive Income vs Cash
The scenario above illustrates the critical point that viable businesses with positive net income are still at risk of short term cash issues. Accurate tracking and foresight are key to avoiding these problems with new and growing businesses.
Section Materials:
Post to Twitter