Cash flow is the measure of how much cash is moving in or out of your business in a given period of time. For example, during one month, you might pay $5,000 in bills and receive $8,000 in cash from your customers. In this case, your total cash flow would be $3,000. Cash flow calculations are essentially this simple:
Cash Received – Cash Paid Out = Cash Flow
A cash flow statement is the record of the change in the balance of cash your business has on hand at any given time. The cash flow statement is a valuable tool for understanding and planning your cash flow. It is not a snapshot like the balance sheet. Instead, it measures the change in cash during a period. How much money did you start and end with? What changed in between to make it go up or down?
This view of future cash is one of the most important things about business planning. It enables you to see whether your plans, if executed well, will produce and maintain a sustainable business. You will need to include a cash flow projection in your business plan document and you will need to keep an eye on cash flow so long as your doors remain open for trading. This means keeping an up-to-date cash flow plan as you run and grow your business.
Note: None of the lines in the cash flow statement can be edited directly. To edit the cash flow numbers, go to the Forecast tab and make changes there. The cash flow statement will update automatically.
For additional reading about cash flow, we recommend these articles:
Reading the LivePlan cash flow statement
To locate the cash flow statement in LivePlan, click the Forecast tab and then Cash Flow:
Here's a line-by-line explanation of the LivePlan cash flow statement:
Net Cash from Operations
Net Profit - The net profit here is the same as the one in your Profit and Loss (P&L) statement. Net profit, also referred to as net income or net earnings, is your "bottom line." If this number is negative, you’ll know that you are running at a loss. Either your expenses are too high, your revenue is in a slump, or both.
Depreciation and Amortization - This line will only be included if you've added an asset to your forecast. The idea behind depreciation is to break up the value of a major purchase (such as an automobile or an expensive piece of equipment) to recognize a portion of the cost during each period of the asset's useful life, rather than having one big expense up front. That keeps major purchases from having a drastic — and misleading — effect on your profitability at the time of purchase. On the P&L statement, depreciation is treated as an expense and reduces your net profit. On the cash flow statement, it is added back in as positive cash flow, just to offset the fact that the net profit calculation — the starting point for the cash flow statement — has already deducted it.
Change in Accounts Receivable - This line explains how the payment terms you’ve agreed on with your customers affect your cash. It accounts for those times when you sell a product or service, but your customer doesn't pay you right away. If this number is negative, it means that your customers owe more than they have paid you, so your cash decreases to account for the money you have not yet received. If this number is positive, it means that your customers have paid you more than they owe, so your cash increases to account for the extra money.
Change in Inventory - If you have inventory management turned on, you will be purchasing inventory before it is actually sold, so the effect of that purchase has to be adjusted in the cash flow statement. A negative change in inventory number means that you have purchased more inventory than you have sold, and a positive number means that you have purchased less inventory than you have sold, for that period.
Change in Accounts Payable - Accounts payable refers to money that you owe to your creditors or suppliers but have not paid yet. If this number is positive, you have incurred more expenses (which were taken out of your net profit) than you have actually paid; so you still have the cash for these expenses. If this number is negative, it means that you have paid more on previous bills owed than you have incurred in new expenses, so you have less cash on hand.
Change in Income/Sales Tax Payable - Any tax that your customers pay you, and that you have to pay to the government, is not included in your net profit, because it does not affect your profit margins, only your cash balance. If you have collected sales tax or VAT from your customers, but have not yet paid that money to the government, then you have extra cash on hand for that period. A positive value means that you have collected more sales tax/VAT for that period than you have paid out to the government, and so have more cash on hand. A negative value means that you have paid out more sales tax/VAT to the government than you have collected from your customers during that period, and so have less cash on hand.
Net Cash from Investing
- Investments Received - This line comes directly from any investments you added into the Financing area of the forecast. It is handled separately, since investments are not counted as either long-term or short-term debt, and reflects the cash coming in from any investments received during that period.
Assets Purchased or Sold - This line comes from the total amount of assets that you have purchased for your business. This is a negative number representing the cash being paid out for the purchase of those assets. Note that the purchase of an asset and the source of the cash used to pay for that asset (such as a loan) are handled separately.
Net Cash from Financing
Dividends and Distributions - This line represents the total of any dividends you added in the More... > Dividends area of the forecast.
Change in Short-Term Debt/Change in Long-Term Debt - Both of these lines come directly from any loans or custom funding entered into the Financing area of the forecast. They are split out depending on whether the funding is a short-term debt (to be paid within a year of receipt), or long-term debt. Whether funding is long- or short-term can also be directly specified for each funding source in the Financing area.
Totaling It All Up
Cash at Beginning of Period - This is the previous period's Cash at End of Period total, carried over.
Net Change in Cash - This is Net Cash Flow from Operations plus Net Cash Flow from Investing and Net Cash Flow from Financing from this period.
Cash at End of Period - This is the Cash at Beginning of Period plus the Net Change in Cash, giving a total amount of cash on hand for this period.