Know the Four W's and the H of Cash Flow Statements

The information on a cash flow statement:

• shows the expected collection of revenues and payment of expenses during the time frame established, usually 12 months;
• helps you recognize that cash comes and goes in cycles, which will help you plan accordingly;
• assists you in planning for revenues by prioritizing, anticipating and allotting the revenues expected against the expenditure of funds;
• demonstrates when it will be necessary to obtain new funds by getting more business or borrowing money;
• signals when to cut expenses where the collected revenues will be inadequate to meet your desires; and
• helps you see where you need to revise goals and other elements of your business plan.

A cash flow statement is a financial document that illustrates exactly where and how your firm will receive and spend its money during each year. The main principle to bear in mind is keeping it short and simple; otherwise, it simply won't be used.

The statement should be a chart containing three pages:

• Page 1 should be a projection of the revenue to be collected by the firm.
• Page 2 should be a projection of the expenses to be paid by the firm.
• Page 3 should be a summary of the information on the first two pages.

Larger firms typically have in-house financial staff to crunch the numbers for them. It's different for smaller firms. If yours is a solo or small firm and you don't have the time to do detailed cash flow work yourself, or if you feel less than proficient with numbers, get someone you can trust to put together all of the figures and do the clerical work — such as your accountant or bookkeeper, a trusted employee, or your financial adviser.

Remember, though, that you must be involved in making all of the assumptions that go into the statement and evaluating the statement so that you can complete and implement the financial plan.

Because the cash flow statement usually covers a period of at least 12 months into the future, you should revise it monthly, at a minimum, to compare expected results with actual results.

Use a rolling 12-month cash flow budget where every 30 days you delete the oldest month on the statement, make appropriate revisions, and add a new month at the point farthest out in time.

Once you see the projected monthly figures in black and white, you may decide, for instance, to revise your forecast of the total amount of billing you expect for the coming year. For example, if you hear that the regional economy is expected to be bleak for the next year, you might decide that your projected income for real estate transactions might be too high.

The three-page cash flow statement can be created in a number of ways: You can use a standard spreadsheet application, a basic accounting program or the accounting module in a practice management program.