“A cash flow statement is a financial statement that measures the cash generated or used by a company in a given period. It typically sets out a company’s cash sources and uses for the period into three categories: cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities.” Investing Answers

The cash flow statement (sometimes called the ‘statement of cash flows’) reflects the actual amount of money the company receives from its operations. It reports on the cash coming in and going out during the time interval specified in its heading (for instance, the heading may state “For the Three Months Ended June 30, 2018” or “The Fiscal Year Ended December 31, 2017”). That time period is chosen by the company.

A cash flow statement can be retrospective (in other words, it reports on what has already happened), or it can be a forecast (estimating what the cash flow is likely to be in the future). This is one reason why the dates need to be made clear in the statement’s heading.

If more money is coming in to your business than is going out, you are in a “positive cash flow” situation and you have enough to pay your bills. If more cash is going out than coming in, you are in danger of being overdrawn, and you will need to find money to cover your overdraft(s). This is why new businesses typically need working capital, in the form of a loan or line of credit, to cover shortages in cash flow. [1]
Lack of capital and/or poor understanding of cash flow is one of the main reasons for small businesses failing. [2]

Managing cash flow can be particularly difficult when you are starting a business. You have a lot of expenses to cover, and you may have no sales or customers who are paying you yet. Other temporary sources of cash, like a temporary line of credit, can help get you going and into a positive cash flow situation.

Cash flow is also important for seasonal businesses – those that have a large fluctuation of business at different times of the year, like holiday businesses and summer businesses [3].


Required reading

Read the following texts:

  1. Cash Flow Statement by Entrepreneur.
  2. Analyze Cash Flow The Easy Way by Investopedia.
  3. Sample Cash Flow Statement by Nolo. An excellent worked example of a cash flow forecast or projection. This can help you look ahead and see when there may be challenges with cash flow, so that you can plan in advance (for instance, by reviewing the terms of any credit sales / accounts receivable). It is good practice to prepare this type of cash flow forecast, and then to compare it with actual figures.


Thinking about your own entrepreneurial idea, create a simple spreadsheet to forecast your cash flow for six months (of your choosing) and examine your “Cash at End of Month” over the period. (Use the example in number 3 above to help you; at this stage, your forecast may not be as detailed, but it will still give you an idea of your projected cash flow).

Share your answers to the following questions:

  • Do you foresee any months where your cash flow will go negative? What could you do to correct this?
  • What do you think the biggest problem will be in cash flow, for your business idea? (For example, high fixed costs, late bill-payers,…)

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  1. The balance: Small business
  2. Business know-how
  3. The balance: Small business