Constructing a Cash-Flow Statement - dummies

By Steven D. Peterson, Peter E. Jaret, Barbara Findlay Schenck

A cash-flow statement is important for your business planning because it tells you how money flowed in and out of your business over a certain time period and how assets of your business changed as a result. Cash-flow statements also offer a great way to forecast and plan before plugging numbers into your income statement or balance sheet.

Your balance sheet and income statements report revenues as they are earned and expenses as they are incurred, which is called accrual basis accounting. The cash-flow statement converts the accrual basis of accounting to a cash basis.

Instead of looking at what you’ve earned and what you owe, it looks at what you’ve collected and spent, and it lets you see at a glance whether more cash is going out than coming in, or vice versa.

In your business, you should review your cash flow at least monthly, using a report that presents side-by-side numbers for two periods so you can track changes in your cash position.

First, see how a cash-flow statement measures financial activity and tracks the effects of changes in your cash position, which shows the cash-flow statement for the Broad Street Emporium gift store as of December 31 of the most recent year alongside cash-flow entries for the previous year for comparison purposes.


If you go to the bottom line, you can see that after all the revenue was collected and all the bills were paid, $12,000 was left over, leaving the company in what is known as a positive cash position.