They say that cash is king. The income statement and balance sheet are the granddaddies of financial statements, but it’s the cash flow statement that determines if you can pay your bills in the short term.
The cash flow statement is an important tool in business, but it can also be a critical tool for the average person when viewing their personal finances. So today, we’ll take a look at how to create a simple cash flow statement.
What Is A Cash Flow Statement?
The name probably tipped you off, but a cash flow statement intends to record the flow of cash in and out of the entity (this could be for a business or for your household). Some of you may wonder whether this type of statement and an income statement are similar. While the conclusion you reach from analyzing a cash flow statement may echo the thoughts you have after reading the income statement, it’s important to note that cash flow and income are not the same thing.
Now let’s take a look at a textbook example of a business cash flow statement:
| Operations |
||
| Additions to cash | ||
| Decrease in Accounts Payable | $100,000 | |
| Increase in Accounts Receivable | $175,000 | |
| Subtractions from cash | ||
| Increase in Inventory | -$40,000 | |
| Net Cash From Operations | $235,000 | |
| Investing |
||
| Additions to cash | ||
| Sale of ACME stock | $100,000 | |
| Subtractions from cash | ||
| Purchase of Wiley stock | -$400,000 | |
| Net Cash From Investing | -$300,000 | |
| Financing |
||
| Additions to cash | ||
| Notes Payable | $500,000 | |
| Net Cash From Financing | $500,000 | |
| Net Cash Flow | $435,000 | |
If you’re not familiar with financial statements, you may have already stumbled over a few items — accounts receivable (money owed to you by customers), accounts payable (money you owe to suppliers), and notes payable (a loan).
While there is a preferred format for business cash flow statements, let’s set that aside. You’re creating a cash flow statement for your own household –- for your benefit. No regulatory agency is going to see this statement. It’s only important that you are able to create the cash flow statement easily and that you get a clear picture of your cash flow from it. Beauty is in the eye of the beholder.
A Personal Cash Flow Statement Example
So let’s say your rich uncle gives you $10,000 for your birthday. This is part of cash flow, but not income. Let’s expound on this further with a deeper example. Cash flow statements reflect a specific period of time. This can be any period of time, but for the sake of simplicity, let’s use a simple example of one year.
Your take home pay for the year was $24,951. You also earned $141.16 in interest on your high yield checking account. You paid $9,431 toward your mortgage (includes escrow), $3,600 in car payments, $1,800 for gas, $500 for car maintenance, $5,000 for groceries, $2,500 dining out, $1,800 for utilities, $1,875 for clothes, $500 for books, $1,200 for entertainment, and $2,000 for miscellaneous expenses (you can –- and should –- break them down further, but this is just an example).
Let’s look at what we have so far:
| Inflows | ||
| Wages | $24,951 | |
| Interest income | $141.16 | |
| Total Inflows | $25,092.16 | |
| Outflows | ||
| Mortgage | $9,431 | |
| Car Payments | $3,600 | |
| Car Maintenance | $500 | |
| Groceries | $5,000 | |
| Dining Out | $2,500 | |
| Utilities | $1,800 | |
| Clothes | $1,875 | |
| Books | $500 | |
| Entertainment | $1,200 | |
| Miscellaneous | $2,000 | |
| Total Outflows | $28,406 | |
| Net Cash Flow | -$3,313.84 | |
You probably noticed that this personal cash flow statement is just showing net wages, rather than listing net wages and then reducing the amount with corresponding outflows for taxes, insurance premiums, etc. Focus on the fact that this is for your personal use. Sure, you can present the data that was, but you’re adding complexity for very little benefit. In terms of your liquidity, the amount of your net pay is what matters, not how you arrive at that number. Keep things simple and you’re more likely to make the effort to create the cash flow statement (and make this a habit).
My general rule: if it doesn’t go into or out of a liquid account (such as savings or checking), it doesn’t belong on the cash flow statement. That is, a direct deposit from your pay check into your 401(k) doesn’t impact your ability to buy groceries tomorrow, so it’s not in the picture.
Back to the example above: you probably also noticed that you have a negative cash flow. Oops.
Luckily, this is not your complete cash flow statement. You have some other non-recurring items.
- Your rich uncle gives you $10,000 in cash.
- You sell your vast collection of investment-grade beanie babies for $14.47.
- In a rare display of generosity, you give a donation of $3,141.59 to your high school’s math department after eating a particularly delicious slice of lemon meringue “pi” at the annual bake sale.
Let’s take a look at the revised cash flow statement.
| Regular Activities |
||
| Regular Inflows | ||
| Wages | $24,951 | |
| Interest income | $141.16 | |
| Total Regular Inflows | $25,092.16 | |
| Regular Outflows | ||
| Mortgage | $9,431 | |
| Car Payments | $3,600 | |
| Car Maintenance | $500 | |
| Groceries | $5,000 | |
| Dining Out | $2,500 | |
| Utilities | $1,800 | |
| Clothes | $1,875 | |
| Books | $500 | |
| Entertainment | $1,200 | |
| Miscellaneous | $2,000 | |
| Total Regular Outflows | $28,406 | |
| Cash Flow – Regular Activities |
-$3,313.84 | |
| Irregular Activities |
||
| Irregular Inflows | ||
| Gift from uncle | $10,000 | |
| Sale of collectible items | $14.47 | |
| Total Irregular Inflows | $10,014.47 | |
| Irregular Outflows | ||
| Donation | $3,141.59 | |
| Total Irregular Outflows | $3,141.59 | |
| Cash Flow – Irregular Activities |
$6,872.88 | |
| Net Cash Flow | $3,559.04 | |
OK, much better. You have a positive cash flow for the year. Great news. That’s a much better position to be in.
However … this doesn’t change your prospects for next year. Barring unpredictable events such as gifts from generous relatives, you’re going to have a negative cash flow next year.
While non-recurring items give a more complete picture of your current cash flow, the static recurring items are the better predictor of the future. If your cash flow from normal inflows and outflows is negative, then this is a problem.
I’ve given a simple example of a cash flow statement. I urge you to tweak the example until you have a format that works for you. The key point to keep in mind is to separate the recurring items from the non-recurring ones, so that you can use the cash flow statement as record of the cash flow in the current period, as well as a predictor of cash flow in the future.
Created February 10, 2008. Updated November 6, 2011. Copyright © 2011 The Digerati Life. All Rights Reserved.
{ 3 comments… read them below or add one }
With regards to business cash flow: one good thing you can do to improve your cash flow is to manage your debtors, creditors and inventory more effectively. This not only improves your money management, but effectively drives more cash flow into your business.
The cash flow tab in Quicken does this sort of thing already: it totals your bills and savings targets for the month (your “outflow”, your income for the month (your “inflow”), and then tells you the difference. I use the Cash Flow page in combination with the Projected Income chart to plan out my finances for this month (and the next, when credit card bills become due).
You want to make your savings goals as large as you can; the total income for the month minus your bills for the month gives you the maximum upper bound. You want to leave some positive difference between total inflow and total outflow, to account for non-recurring expenses.
If your unplanned expenses for the month (e.g. tickets to see a favorite performer at a club) leave you with a minus difference between total inflow and total outflow, then you have to adjust your total savings down, to make your total outflow smaller, enough to make the difference between inflow and outflow zero or positive.
There are savings buckets for medium-term savings goals (new car, vacation fund, etc), and another savings bucket for one of my hobbies (I don’t have hobby-related expenses every month, so I use that bucket to accumulate any unspent budget), and a dedicated savings bucket for my emergency fund.
If I have to save less this month to account for an unplanned expense, then I can either use my hobby savings (e.g. I’m trading the pleasure of a hobby for the pleasure of seeing a concert, etc), or contribute less to my emergency fund.
Note that it would not be appropriate to tap my emergency fund savings for non-emergency savings — all I’m talking about here is saving less this month (if indeed that’s necessary — the money for the expense might come from somewhere else).
Note also that you should always contribute to a savings account, even if the amount is small. If you have an unplanned expense, that you need to pay from savings instead of income (perhaps the expense was larger than usual, or you had less income this month), it doesn’t mean you don’t save at all, it just means that you save less. If you don’t put something in that bucket, then you’ll never reach your goal. If you are unable to put anything in savings, then it means that you’re spending too much.
Thought I had already responded to this, but I guess I hadn’t.
@ Matthew – Yes, many personal finance software packages will create a cash flow statement for you. However, I feel that there’s value in know what goes into the process.
The reason why I separate out regular and irregular is to aid in projecting. If it’s November 1 and you’ve earned $100,000 this year, it might sound reasonable to project November’s income to be $10,000, since you’re averaging 10K/month. However, if 80K is due to an inheritance, then suddently this projection is way off. Thus, I use the regular ioncome/expense as the baseline and tweak the numbers from there.