To know the liquidity of our business, one of the simplest and most useful financial reports to prepare is a cash flow. Its purpose is to capture the income and expenses of our company for a specific period and thus know if we have enough cash in hand. In short, it is useful to know if we have liquidity!

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This report can be done daily, weekly, monthly, or even annually if the company requires it, and not only allows us to know the status of our expenses and income current, but we can also estimate what you will earn and spend in the future, taking into account every company has regular expenses such as the payment of services, payments of bank loans, payment of salaries and more.

To make a cash flow, which you can do in just an excel spreadsheet, you need to have:

  • A defined period (day, week, month, etc.)
  • Initial balance
  • Income
  • total income
  • Expenses
  • Total expenses
  • Net flow

And since there is no better way to explain a topic than with an example, we have decided, as we explain each point, to create a cash flow with only 8 steps for our example company Santiago Textiles (which we already used in our article on income statement). You can apply the format to your own project.

This is what you need to do:

  1. Define the period

The main thing is to set the income and expense period for our cash flow, be it daily, weekly, monthly, quarterly or yearly. Startups and SMEs tend to do daily, weekly and monthly cash flows, while large ones, which have been in the market for many years, usually opt for quarterly or annual cash flows.

In our example, we enter the data in the form monthly.

2. Set the beginning balance

The next step is to establish the opening balance. This balance is the money in cash with which we have input, generally the initial capital that we have used to establish the company (if it is new), or the money that was left over in cash from the previous period and that we can use in payments for services, salaries, debts and other things.

Our company's opening balance for month 1 is US$ 20.000

3. Add income

The income of a company are all those sources that allow to increase the money in cash and that are available to be used. Only the money we have on hand should be included in the cash flow, that is, the one we can spend.

Within this report we can include the checkbook or accounts receivable we only know on what date we are going to collect them (as we will see in the example), since although it is money that has entered the company and is included in other reports (such as the income statement) we do not have that money boxed to use.

So, the income of our company is:

US$ 550 for training

US$ 1200 by ebook sales

US$ 700 of a check for advertising services that will be collected the following month

4. Calculate total income

The total income is nothing more than the sum of all the sales and sources of income that we have had in the established period.

In the case of our company, the total income for month 1 is US$ 1.750

5. Add expenses

The expenses are equivalent to the expenses that we have during the period established in our cash flow. Purchases that come out of the box enter this account, regardless of whether or not they are useful to the company. Disbursements that are not made in cash, such as payments to suppliers, must be recorded on the date of disbursement. Similarly, payroll expenses, including social security expenses, will be included in expenses as a forecast and will be recorded in the month in which they are made.

Thus, the expenses of our company are:

US$ 310 power

US$ 80 Packages

US$ 110 bank loan payment

US$ 90 internet / phone

US$ 50 personal shopping

6. Calculate total expenses

As with income, expenses are added to get the total.

Our total outgoings for month 1 is US$ 640

7. Calculate the net flow

Once we have the total income and the total expenses established, we add the beginning balance with the total income, and then we subtract the total expenses. The balance can be positive, negative or neutral.

With this in mind, the net flow for the first month of our company would be

US$ 21.110

In the event that the result is positive, it can be invested in machinery renewal, debt interest payments, payments to suppliers, or leave that balance as a reserve for months that may have adverse behavior. On the other hand, if it is negative and you do not have a reserve, you could make an agreement to extend payments to suppliers or refinance a debt, which could reduce the installments and make your monthly payment easier.

8. Repeat for the next period

For the second month, the same process is repeated: we take the initial balance, this time we add to the income the US$ 700 that we charge for advertising services and we take out the expenses. We add the opening balance to the total ingresos, and then we subtract the total expenses to obtain the net flow, which would give us a cash flow as follows in the following format:

Month 1Month 2
Initial balance20.00021.110
ebook sales1200920
Check for advertising services700
Total income1.7502.100
Bank loan payment110110
internet / phone9090
Personal shopping50150
Total expenses640741
Net flow21.11022.469

Finally, remember that it is ideal that the cash flow is done in advance, taking the information of what we know and that we can be sure that we are going to predict. In this way we can know what our sources of income and regular expenses are, in order to anticipate and make the right decisions.

With information from a press release.

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