10 Ways to Prepare a Cash Flow Statement Model That Actually Balances

10 Ways to Prepare a Cash Flow Statement Model That Actually Balances

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 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 a cash flow statement model that balances by following these ten tips.

Top ways to prepare a cash flow statement model

  1. Prepare A Trial Balance

Prepare a Trial Balance

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.

  1. List All Assets and Liabilities

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.


Also Read: 7 Proven Strategies to Increase Cash Flow with Passive Income


  1. Calculate the Net Working Capital

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 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.

  1. 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:

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.


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.

  1. Calculate EBIT before adjustments

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

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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  1. Check Your Work and Make Corrections If Necessary

Check Your Work and Make Corrections If Necessary

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.


Also Read: Beginner’s Guide For Managing Cash Flow as a Freelancer


  1. Read Cash Flow Analysis For Clues About Future Performance


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 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.

  1. Go Through Cash Flows From Operations, Investing, Financing, And Operating

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 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.

  1. Don’t create an income statement with negative net income

Don’t create an income statement with negative net income

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.

  1. Adjust for any large non-cash transactions

Adjust for any large non-cash transactions

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 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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