Putting It Together: Statement of Cash Flows

The importance of cash flow analysis and forecasting cannot be stressed enough. As a manager, you may be tasked with preparing this analysis, or understanding it in order to improve the operation of the business you work for.  Two methods exist to prepare the cash flow statements, including the direct method, which simply takes the income statement to a cash based format, or the indirect method, which starts with net income and adds and subtracts the items from the income statement that were not cash.

Depreciation is automatically added back, as it is a non-cash expense. Then each account is analyzed to come to the net change in cash for a given period. Both methods will get you to the same answer, and this answer should match the cash balance on your balance sheet when you are finished!

As noted at the beginning of this module, there are great resources out there with templates, and assistance in preparing cash flow statements. The module also has some charts and examples to help you better understand how to determine and improve cash flow.