How to write a cash flow

August 14, 2009

A cash flow is nothing more than a running monthly projection of income and expenditure. However, the format of the final annual cash flow seems quite intimidating to someone who has never seen one before. The trick to understanding the cash flow is to build one up from scratch. The following is a made-up example.

The first table shows the income and expenditure statement for a start-up confectionary business in month one. Sales are all cash with no credit sales and account to €13,500. Expenses account for €18,542.70. Materials are stock for resale and account for €15,500 of this and other overheads make up €3,042.70.

cashflow1

Table 2 shows table 1 plus the addition of a running total to the end of the income/expenditure statement. As the company started up with a balance of €0.00 and made a loss of €5,042.70, the position at the end of month 1 is a loss of €5,042.70. Now, if this is quite simple then building up the rest of the cash flow will be equally as simple.

Let us now work out a cash flow for the first quarter (first 3 months). As can be seen month 1 is exactly the same as before. Month 2 shows an income of €13,950 and expenses of €14,443.23, thus generating an operating loss in Month 2 of €493.23. At the end of Month 2 the business has accumulated a cash flow loss of €5,535.93. In Month 3 income of €13,950 is generated and expenses incurred are €12,461.16, resulting in an operating profit of €1,488.84. Thus, at the end of Month 3 having had two months of losses and one month of profit, the running cash flow position from the start of the quarter to the end of the quarter is a negative €4,047.09.

cashflow2

Sales are holding steady as are overheads in the main, but as the shop stocks it shelves over time, less stock is required to be added every month and the cost of materials (goods for resale) is falling to a sustainable level month on month. Now if we extend this exercise for 12 months we get the final cash flow.

cashflow4

As can be seen the figures for the first quarter are exactly the same. As the year progresses sales increase and overheads and cost of materials balance out. By the end of the year the company is in profit and has a healthy cash flow position, ultimately making a profit of €17,481.42. If you were to look at the last table first, then this exercise might seem daunting. However, if you build up from month one, the final 12-month cash flow seems far more doable.

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