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Cash Flow Statements

Cash flow statements are one of the most important financial statements for managing your eCommerce accounting and finances. Cash flow statements break down the cash income and expenses of a business, and detail whether a business has received enough cash in that period to cover all operating expenses and running costs. 

Cash flow is particularly important for running small eCommerce companies who are more likely to experience cash shortages and often have fewer credit opportunities available to navigate poor cash flow periods. 

 

What is a Cash Flow Statement?

Cash flow statements are financial documents that outline how much cash is coming into and out of a business over a period of time, most commonly, on a month-by-month basis. 

Cash flow statements are laid out like a structured bank statement, with cash inflows detailed in one section, and outflows in another. This allows owners to quickly see the types of transactions that have been made during that period as well as the exact value of each transaction. After laying out the transactions for that period, a cash flow statement also provides a figure of how much cash is left over after all costs have been accounted for, this is known as your cash flow. 

Cash flow statements, unlike balance sheets, contain only cash transactions, and are not a representation of the profitability of a business.

The key features of a cash flow statement are;

  • Cash from Operating Activities

This is simply any cash generated from selling your products or services and cann include; interest payments, revenue from sales, website hosting fees, salaries, income tax, cost of customer service software, and other operating cash transactions.

  • Cash from Investing Activities

Investing activities accounts for any money spent or received in fixed assets such as the purchase of property such as a warehouse, or purchase of equipment which can include computers, printers and other electrical equipment.

  • Cash from Financing Activities

This is any money involved in funding your business such as loans, dividends or equity.

To calculate the net cash flow of your business, you can use the following formula:

Net Cash Flow = Net Cash from Operating Activities + Net Cash from Investing Activities + Net Cash from Financing Activities

 

How to use a Cash Flow Statement

The amount of detail on a cash flow statement makes them an incredibly useful document for business planning and decision making. Cash flow statements can be used to gain an understanding of the day-to-day financial running of a business, providing information on where money is coming in and where it is being spent. It also creates a view of whether an organisation has enough cash to cover all upcoming cash expenses, identifying any cash gaps that may need addressing.

Cash flow statements can also be used to form the basis of a cash flow forecast and make predictions about future cash flows. This gives businesses greater foresight into potential periods of negative cash flow, and time to plan ahead and make arrangements to ensure all costs can be covered. 

Below is an example of a cash flow statement covering a period of 3 months using the direct method. The direct method, as seen in this table, lays out all of the cash income and expenditure for each month, offering a detailed breakdown of all transactions. Due to the level of detail required to create a cash flow statement using the direct method it can be quite time consuming. For a quicker way to gain insight into your cash flow, business owners can also use the indirect method. This method takes the net income from the business’ balance sheet and makes adjustments for its inclusion of non-cash expenses to give an estimate of cash flow. 

In this example of a cash flow statement, we can see that this eCommerce business experienced negative cash flow for the months of February and March. However, by using a cash flow statement, these owners can see that despite experiencing negative cash flow for these two months, they still have enough surplus cash from January to help cover the expenses for this period. Keeping surplus cash behind to support the business during negative cash flow periods is an example of effective cash flow management.

 

JAN

FEB

MARCH

TOTAL

Cash Income

 

 

 

 

Investment

35,000

 

 

35,000

Sales

3,000

4,000

4,500

11,500

TOTAL INCOME

38,000

4,000

4,500

46,500

         

Cash Outgoings

 

 

 

 

Materials

1,500

2,000

2,400

5,900

Marketing (Google Adwords, Facebook Ads, etc)

300

300

300

900

Legal & Accounting

1,100

1,000

1,000

3,100

Salaries

2,000

2,000

2,000

6,000

Other costs

500

2,500

800

1,500

eCommerce Platform Fees

80

80

80

240

TOTAL OUTGOINGS

5,480

7,880

6,580

19,940

         

Net Cash Flow

32,520

-3,880

 

 

 

 

 

 

 

Opening balance

0

32,520

-2,080

 

Closing balance

32,520

28,640

26,560

 

Fig.1.

 

Cash Flow Statements for Ecommerce Businesses

To get the most out of your cash flow statement, it is important to take the time to analyse what it is showing you, rather than fixating on net cash flow figures alone.

In the example cash flow statement seen above (fig.1.), we can see that this eCommerce business experienced negative cash flow for the months of February and March. However, by using a cash flow statement, these owners can see that despite experiencing negative cash flow for these two months, they still have enough surplus cash from January to help cover the expenses for this period. Keeping surplus cash behind to support the business during negative cash flow periods is an example of effective cash flow management.

This second eCommerce business (fig. 2) has a slightly different structure to their cash flow statement. This eCommerce business is experiencing negative cash flow for the period of this statement. However, these business owners may not be too worried about this cash flow shortage, as they have £6,000 in cash at the beginning of the month which can help cover their expenses. Additionally, their equipment expenses of £2,100 is unlikely to be a regular cash outgoing, meaning that they are likely to experience positive cash flow in the periods shortly following this statement. 

 

JAN

Cash, Beginning of Period

6,000

   

Cash Flow from Operating Activities

 

Net Income

3,000

Increase in accounts receivable 

-1,000

Net Cash Flow from Operating Activities

2,000

   

Cash Flow from Investing Activities

 

Purchase of equipment

-2,100

 

 

Cash Flow from Financing Activities

 

N/A

0

   

Cash Flow for month ending 31st January

-100

Fig.2.

 

Conclusion

Cash flow statements offer valuable insights into a business' daily financial performance. Used alongside other financial statements they can allow for more informed business decision making and a more detailed understanding of how and where money is spent. 

Using a cash flow statement as the basis for a cash flow forecast to predict future cash flow surplus or shortages can ensure that your business always has enough capital to cover cash expenses. 

To get started using cash flow forecasting and for more information on cash flow statements download the rest of our eBook chapters.

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