A few years ago, I met a small business owner who was puzzled by cash flow statements. “I make a profit every month,” she told me, “but I’m constantly worried about having enough cash to pay my bills. How is that possible?”
Her question gets to the heart of why cash flow statements matter. You can be profitable on paper but still struggle with cash. This disconnect catches many business owners by surprise. Let’s explore when and why you need to prepare these crucial financial documents.
What is the Purpose of Preparing a Cash Flow Statement?
The cash flow statement exists to answer one deceptively simple question: where did your money come from, and where did it go?
Unlike the income statement (which shows profitability) or the balance sheet (which shows what you own and owe), the cash flow statement tracks actual money moving in and out of your business. It’s like a detailed bank statement with better organization.
The statement serves three main purposes:
- Tracking liquidity – Can you pay your bills next month? Next quarter? The cash flow statement gives you the clearest picture of your short-term financial health.
- Evaluating operational efficiency – Are your business operations generating or consuming cash? This helps you understand if your core business model works.
- Assessing investment and financing activities – How are your investments performing? Are your financing strategies sustainable? The cash flow statement breaks these out separately.
I often tell business owners that while profit is an opinion (influenced by accounting methods), cash is a fact. You either have it or you don’t. The cash flow statement deals with this reality.
How Frequently is a Cash Flow Statement Prepared?
The frequency of preparation depends on both external requirements and internal needs:
Standard Reporting Periods
Quarterly and Annual Reports: Public companies must prepare cash flow statements quarterly and annually as part of their SEC filings. These align with their 10-Q and 10-K reports.
Year-End Financial Statements: Most businesses, including private companies, prepare annual cash flow statements alongside their other year-end financial statements.
Internal Management Needs
Monthly Cash Flow Analysis: Many businesses prepare monthly cash flow statements for internal management. This frequency helps catch potential cash problems before they become critical.
Weekly Cash Flow Forecasts: Some businesses, especially those with tight cash positions or seasonal fluctuations, prepare weekly cash flow forecasts. These aren’t usually formal statements but help with immediate cash management.
I’ve noticed that smaller businesses often start with annual statements (often prepared by their accountant) but gradually move to more frequent analysis as they grow and appreciate the value of this information.
Who Requires the Preparation of a Cash Flow Statement?
Different entities prepare cash flow statements for different reasons:
Public Companies
For public companies, cash flow statements aren’t optional. They’re required by:
- Securities and Exchange Commission (SEC)
- Financial Accounting Standards Board (FASB)
- International Financial Reporting Standards (IFRS)
These requirements exist to provide transparency to investors and the public.
Private Companies
Private companies prepare cash flow statements for:
- Bank Requirements: Lenders often require cash flow statements before approving loans.
- Investor Demands: Investors want to see how their money is being used and whether the business generates positive cash flow.
- Internal Management: Smart business owners use cash flow statements to make better decisions.
Startups and Small-to-Medium Enterprises (SMEs)
For smaller businesses, cash flow statements are crucial for:
- Survival Planning: Cash flow problems are the number one killer of small businesses.
- Growth Management: Understanding cash flow helps plan sustainable growth.
- Pricing Strategy: Knowing your cash position helps determine if you can afford customer payment terms.
I’ve seen too many promising small businesses fail because they didn’t pay enough attention to cash flow. Don’t be one of them.
What Triggers the Preparation of a Cash Flow Statement?
Beyond regular reporting periods, several events might trigger the need for a cash flow statement:
End of an Accounting Period
The most common trigger is the end of a standard accounting period:
- Monthly (for internal management)
- Quarterly (for public companies and larger businesses)
- Annually (for regulatory, tax, and review purposes)
Financing Activities
Cash flow statements are particularly important when:
- Applying for loans: Banks want to see your cash flow history and projections.
- Seeking investors: Potential investors carefully scrutinize cash flow to evaluate risk.
- Renegotiating credit terms: Suppliers may want to see your cash flow before extending credit.
Business Transitions
Cash flow statements become critical during:
- Business acquisition or sale: Both buyers and sellers need clear cash flow information.
- Expansion plans: Major growth requires understanding your cash position.
- New product launches: These often require significant cash before generating returns.
Financial Distress
When a business faces financial challenges, cash flow statements help:
- Identify the root cause of cash shortages
- Develop strategies to improve cash position
- Communicate with stakeholders about the situation
Practical Advice for Small Business Owners
If you’re a small business owner, here’s my advice:
- Start simple: Don’t get overwhelmed. A basic cash flow statement is better than none.
- Make it regular: Set a schedule for preparing your cash flow statement, even if it’s just quarterly to start.
- Look for patterns: Pay attention to seasonal fluctuations and timing mismatches between income and expenses.
- Use it to forecast: Your historical cash flow statement is the best foundation for future projections.
- Compare to projections: Regularly check your actual cash flow against your projections to improve your forecasting.
The value of a cash flow statement isn’t in the document itself, but in the insights it provides and the actions it helps you take.
Conclusion
Cash flow statements aren’t just financial documents required by regulators or investors. They’re practical tools that help you understand and manage your business. They reveal the truth about your financial situation in a way that profit and loss statements simply can’t.
Remember my friend from the beginning? Once she started preparing regular cash flow statements, she discovered that her generous payment terms were causing her cash crunch. By adjusting her invoicing and collection practices, she maintained her profitability while dramatically improving her cash position.
Understanding when and why to prepare cash flow statements isn’t just about compliance—it’s about business survival and success. And that’s something every business owner should care about.