Whether you’re a sole trader looking to improve your business finances or just starting out in small business, understanding cashflow statements should be top of your priorities list.
Not everybody’s comfortable working with numbers and coming to terms with financial statements can feel overwhelming for many freelancers and new business starters.
Cashflow statements are a great example of this, because they’re also one of the most important types of statements to get your head around. Of course, you could leave it all up to a good bookkeeper, but you’d be missing a real opportunity to truly understand how your business operates.
This article will cover:
What is a cashflow statement and why you need one
How to create a cashflow statement
Ways to use your cashflow statement
Learning to read cashflow statements will offer you an insight into the health of your business at any one time, which is an important first step to being able to create a cashflow forecast. Let’s start from the top.
Firstly, a cashflow statement is one of three financial statements used to provide information about a business. You may also have heard of the ‘balance sheet’ or a ‘profit and loss statement’.
Like the way a business plan helps provide an overview of your offering, financial statements can provide a similar snapshot of the monetary side of your business.
A cashflow statement shows us how much cash is moving in and out of our business over a certain period. A business owner needs to know if there is enough cash in the business to pay expenses. This statement is the one to help you determine this.
Depending on your business, a cashflow statement can be for any particular time period, but monthly statements are popular. A monthly cashflow tells you how much money the business has at the beginning of the month, money that came into the business during that time and money that went out of the business.
The cashflow statement is sometimes called the ‘honest form’ for depicting how your business is going. This is why cashflow statements are so important to business owners: they put the reality of a business in black and white.
You may have heard the term ‘cash is king’. It refers to having positive cashflow in your business — in other words, having more dollars coming in than going out. For this reason, a cashflow statement allows the business owner to answer these basic questions:
How much cash has come in?
How much cash has gone out?
What needs paying?
Can I afford to pay what I need to pay?
Cashflow statements will also be useful when it comes to seeking further funding, as it’s one of the chief documents an investor or bank will want to see.
The most common way businesses produce cashflow statements is through accounting software, like MYOB Essentials.
The reason for this is that accounting software allows you to set up your financial information once and have it update on-the-go. With the full benefit of mobile devices and the internet, invoices and receipts can all be secured and accounted at the tap of a finger.
A more traditional approach will require you to take detailed records of your business transactions before laying them out in a spreadsheet, potentially adding hours to your workday and greatly increasing the risk of errors.
Like any business report or plan it’s vital to understand what the financial statement or report is telling you, and that means going over it in detail. And, when in doubt, you’ll need someone who’s an expert in business finances to help clear things up. It’s never too early or too late to consult with an advisor.
The power of the cashflow statement lies in its ability to reveal how much cash you will need at any given time in your business.
Getting into the habit of running this kind of business report will help you work out what your expenses are and when you need to pay them over longer timeframes. It then becomes a tool for you to identify any red flags that could hamper your growth, or make it hard to pay for staff or supplier, for example.
By heeding these warning signs, you help avoid future financial trouble and create are reliable, more sustainable business in the process.
As you begin to invest more into gaining clients or expanding your operation in some way, you’ll do so with confidence knowing exactly what you’re able to afford.
Source: MYOB April 2021
Reproduced with the permission of MYOB. This article by Ailsa Page was originally published at https://www.myob.com/au/blog/cashflow-statements-for-beginners/
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