The cash flow statement shows how much cash a business brings in and spends over a period of time. It's important for businesses to understand their cash flow because it helps them see if they have enough money to cover their expenses.

1. 10 Ways to Prepare a Cash Flow Statement Model That
Actually Balances
Summary
The cash flow statement shows how much cash a business brings in and spends over a
period of time. It's important for businesses to understand their cash flow because it
helps them see if they have enough money to cover their expenses.
● Ten practical tips on how to prepare cash flow statement from balance sheet include
performing a trial balance, listing assets and liabilities, calculating net working capital,
and more.
● A cash flow analysis helps you to predict future performance and help you make
better decisions to optimize your financial strategy.
● A cash flow management software like Invoicera can be beneficial and make the
process more efficient.
A cash flow statement models the flow of money into and out of your business to
give you a better picture of your existing financial situation and how it’s likely to
change in the future. While cash flow statements are relatively simple to
understand, there are some common misconceptions about how they work and
how they should be prepared that can make them significantly less effective at
giving accurate information than they could be.
How many hours have you wasted with your head in your hands worrying about
the statement of cash flows? It’s incredibly time-consuming and laborious,
especially when you have to make all the calculations yourself. It’s frustrating and
gives you a headache.
Whatever your accounting standards, you’ll probably find gathering cash flow
statements to be one of the most challenging tasks. Whether you use IFRS or US

2. GAAP, this can be a complicated process. There are a lot of individuals who find it
difficult to prepare cash flows because-
● It’s the only statement produced in cash terms, not on an accrual basis.
● Accounting records must be modified to remove non-cash elements, which
may be difficult.
Learn how to prepare cash flow statement from balance sheet by following these ten tips.
Top Ways To Prepare A Cash Flow
Statement Model
● Prepare A Trial Balance

3. Before you even begin creating your cash flow statement model, be sure to
perform a trial balance on your financial statements. You don’t need anything
fancy—just use pen and paper. This is an essential step for three reasons:
● It ensures that your trial balance is balanced.
● By writing out all of your journal entries, you will better understand which
accounts are created when (and why).
● You’ll start getting familiar with your balance sheet and income statement
formats.
Some companies don’t need a trial balance because their cash flow statement is
self-balancing. In other words, money that comes in equals money that goes out;
but if you find that your cash flow statement doesn’t balance on its own, it’s worth
creating one.

4. ● List All Assets and Liabilities
Assets include accounts receivable and inventory, while liabilities include debt due
soon (accounts payable) and long-term obligations like leases or insurance
contracts that must be paid at some point in the future. The primary function of
most cash flow statements is to track how much cash a company brings in each
month compared with how much goes out.
Make sure you have them listed. If you’re unsure of an item on your balance sheet
or a loan that you took out for some reason – find out what it is and put it down.
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Also Read: 7 Proven Strategies to Increase Cash Flow with Passive Income

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● Calculate the Net Working Capital
The net-working capital section of your cash flow statement model is calculated by
subtracting current liabilities from current assets. Items like accounts payable,
receivables, inventory, and fixed assets should be typically included when
calculating net working capital. Current assets are expected to be greater than
current liabilities; however, companies can have negative net working capital if
their obligations exceed their short-term holdings.
If the net-working capital is negative, there are more liabilities than assets. It could
mean that your company has too much inventory, owes suppliers or has
significant accounts payable. It can also mean that your company isn’t making

6. enough sales because your products aren’t selling well. Or it might be due to weak
cash flow or a significant loss of assets such as through theft or natural disaster.
Any of these problems can seriously harm your business and threaten its viability.
● Calculate Current Ratio and Quick Ratio
First, your model should include calculations for the current and quick ratios. The
Current Ratio measures liquidity by looking at current assets against current
liabilities, indicating how well placed an organization is to meet its short-term debt
obligations.
To calculate the Current Ratio, you divide current assets by current liabilities. The
result is compared with historical or industry averages. It is common for big
companies to have higher ratios because they typically have more cash on hand
than smaller companies.
For Example:
The current ratios of two companies- A and B are calculated as given below for FY
21:

7. Company Current Assets
Current
Liabilities Current Ratio
A $130 billion $100 billion 130/100=1.30
B $100 billion $110 billion 100/110= 0.90
It implies that for every $1 of current debt, ‘A’ had 130 cents to pay for its debts.
Similarly, ‘B’ had 90 cents available to pay each dollar of current debt.
Quick Ratio looks similar, but it’s slightly more conservative. It divides current
assets by both short-term debt and liabilities. This can be thought of as an
indication of how quickly a company could pay off its short-term debts with its
liquid assets.
Quick Ratio is helpful because there may be times when you want to know whether
or not a company could make good on some obligations right away, even if it
might not be able to pay everything off in full.

8. For example:
The quick ratios of two companies- P and Q are calculated as given below for FY 21:
Company Quick Assets
Current
Liabilities Quick Ratio
P $15,000 million $35,000 million 15000/33000=0.42
Q $40,000 million $42,000 million 100/110= 0.95
With a quick ratio of 0.95, the company ‘Q’ is in a better position to cover its
current liabilities compared to ‘P’ with a quick ratio well below 1, at 0.42.
Lower Quick Ratio suggests that there is less liquidity available. Like the Current
Ratio, it also gives you an idea of how easily a company can access its liquid assets
to meet obligations and whether or not they are using those resources efficiently
enough.

9. ● Calculate EBIT before adjustments
EBIT—earnings before interest and taxes—is one of my favourite financial
performance measures. It’s a quick way to get an idea of how your company is
performing from operations before you make adjustments.
Let’s learn to calculate EBIT for any organisation-
Suppose there is a healthcare company named ‘XYZ’ and we have the following
financial information from its last fiscal year:
Revenue: $12,00,000
Cost of Goods Sold: $4,00,000
Gross Profit = Revenue- Cost of Goods Sold

10. Gross Profit= $12,00,000- $4,00,000= $8,00,000
Gross Profit= $8,00,000
The ‘XYZ’ gross profit is $8,00,000 before deducting overhead expenses. The
company had the following overhead expenses listed as administrative, general,
and sales expenses:
Overhead Expenses= Sales + General + Administrative: $4,00,000
The EBIT is calculated as:
EBIT= Gross Profit- Overhead Expenses= $8,00,000-$4,00,000= $4,00,000
EBIT: $4,00,000
By calculating EBIT, business owners can measure a company’s profitability and
determine whether or not it is in a good financial position to invest in new
opportunities or expand its operations. Additionally, analysing EBIT can help
business owners assess how well their businesses are performing and identify
areas where they could be making more money.
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● Check Your Work and Make Corrections If
Necessary

11. You’ve calculated your three-year cash flow statement model and it doesn’t
balance. As a next step, you’ll want to take another look at how you ran your
projections for each category: sales, marketing, operations, and finance. You may
have calculated these inputs incorrectly. If that’s not the case, then something in
your inputs changed drastically between your base year and forecast year
(perhaps an employee left or became ill).
Make corrections where necessary, but be sure that those changes do not
fundamentally change other parts of your financial model (such as business
structure). Also, confirm that your accounting is still accurate; even small mistakes
can cause models not to balance.

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Also Read: Beginner’s Guide For Managing Cash Flow as a Freelancer
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● Read Cash Flow Analysis For Clues About
Future Performance
While you can’t look at past performance and know exactly what future results will
be, it is possible to identify trends and issues that will impact future results. For

13. example, cash flow can help identify expenses that may have otherwise gone
unnoticed until they become liabilities (e.g.unpaid invoices).
Another example is identifying cash inflows from one-time events (e.g., over-billing
from old clients) that are masking negative operating trends within your business.
Whatever your industry or business model, take advantage of cash flow
management software tools like Invoicera for clues about what’s going on with
your performance—both now and in the future.
● Go Through Cash Flows From Operations,
Investing, Financing, And Operating
When you’re preparing a cash flow statement, one of your primary tasks is to
balance each month with your opening and closing balances. And that means that

14. every time you record an inflow or outflow, it needs to be balanced on both sides
of your cash flow statement.
However, plenty of things can trip you up in recording these flows and make your
statements unbalanced. For a cash flow statement model to accurately depict
real-world events, you must ensure that it remains evenly balanced from
beginning to end.
Balance The Statement Of Cash Flows In Every Month Over The Year.
● Don’t create an income statement with
negative net income

15. When creating your cash flow statement, you must start with positive net income.
A balanced cash flow statement is only as valuable as its starting point and will
provide no value for your business if it contains negative net income. So, before
you set out to create a cash flow statement, make sure you have net income
already in place; otherwise, your results will be misleading and incorrect.
If you have a negative net income, create an income statement with positive net
income before making your cash flow statement. Once you have a positive net
income, your cash flow model will be relevant and reliable.
To calculate net income, subtract operating expenses from sales revenue and add
non-cash items to arrive at your total profit. You’ll then have everything in place
for building a strong cash flow statement model that accurately reflects the
financial health of your business.
● Adjust for any large non-cash transactions

16. Many companies do not actually have large cash inflows or outflows; they’re
simply engaged in non-cash transactions, such as borrowing money through lines
of credit. When preparing your model, make sure you account for these types of
transactions. To do so, you might need to balance debits and credits by adjusting
any additional income received with expenses paid using assets or equity. For
example, if your firm borrowed $50,000 from its line of credit and paid $25,000
towards equipment (an asset), be sure to add that transaction into your CFSM as a
negative cash flow event.
In most CFSMs, you’ll need to adjust for non-cash transactions. Adjusting your
CFSM in such a way will ensure that it more accurately represents how much cash

17. your business needs from an operational perspective. The debit and credit balance
should sum up to zero before using your CFSM as a working model.
Closing Thoughts
So there you have it, ten accurate methods for preparing a cash flow statement
that actually balances. While it may seem daunting, preparing a cash flow
statement is doable with the right tools. And if you’re searching for an easier way
to get the job done, consider using cash flow software. With this handy tool, you
can easily create and track your company’s cash flow—no accounting degree is
required.
Ready to give it a try? Check out the best financial software to prepare the right
cash flow statement model for your business here.
Thanks for reading!!
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