Preparing a Solid Cash Flow Statement

by Jeff Wright

Preparing a solid cash flow statement is about understanding the timing of the cash inflow and outflow of your flow statement

On the inflow side, it’s about forecasting revenues and understanding the cash cycle of the business. A good place to start is to project sales based on the backlog of business you have. Are the sales supported by purchase orders or work you expect to receive? Don’t fool yourself by showing sales you hope to get. The forecast will be useless if you don’t start with realistic revenue numbers. Once revenue is projected, you need to determine how long the job will take. For manufacturers, how long does it take to convert inventory into cash? What is the inventory turnover rate in days? For service businesses, how long does it take from the time the service is provided to cash is collected? Once an invoice is generated, look at your terms of sale and your historic turnover days on accounts receivable as a guide to when cash will begin flowing back to the company. A strict collection policy should be implemented to keep receivable turnover days to a minimum.

For cash outflow, some expenses are fixed and others are variable. Expenses such as utilities, insurance, wages and taxes, note payments, rent are some examples of relatively fixed expenses and can easily be forecast. Variable expenses are more based on volume and harder to forecast. For example, paying suppliers for inventory purchases, sales and marketing expenses, supplies, and buying assets are more variable in nature. If overtime is required, some fixed expenses like wages and taxes and utilities also can have a variable portion. Identify when you expect to receive cash and when it will be disbursed. Excess cash flow is a result of profitable operations and will allow the company to grow. If additional cash is needed to meet working capital needs, management must consider stretching the use of its cash or relying on banking financing or third party investing to bridge their cash needs. Sale of idle machinery and equipment is also an option as a source of funds.

By comparing the forecast to actual results, management can use the cash flow projection as an effective decision making tool. By rolling them forward, management can be better prepared to handle cash needs before it becomes a problem. I recommend forecasting on a weekly basis. Don’t be caught by surprise when cash flow becomes tight and you have no options. Management will begin spending too much time putting out fires and not enough time focused on growing the business. It could result in lost sales opportunities, disgruntled employees if payroll can’t be met, suppliers that get upset when they are paid outside of terms, or taxes become delinquent.

Download a cashflow template and plan your cash needs for a 12 month period by combining your starting capital and cash expenses.

About the Author


Jeff Wright has been with the Hitachi team since 2006 and contributes more than 26 years of experience in the banking and commercial finance industry. He is currently responsible for business development in the Midwest Region, covering Michigan and Indiana. He works with small businesses and their trusted advisor network to provide factoring and asset-based lending services.

Jeff is involved with professional and civic activities including the Turnaround Management Association, Association for Corporate Growth, National Funding Association, Automation Alley, Walsh College Business Leadership Institute and Walsh College Alumni Association.

He can be reached at or (248) 259-3749.

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