How To Make a Cash Flow Statement: Guide For Freelancers & Agencies

Where’s the money coming from? Where’s it going? Those are two essential questions that every business owner needs to be able to answer. Cash flow statements are how you do that.

Everyone knows that it’s important for businesses to turn a profit. But you should know – it’s possible to turn a profit and still have empty bank accounts! Just as doctors, lawyers, and other high earners can overdraft their accounts despite their sizable salaries, so too can businesses.

Before we go any further, just a quick heads-up – I’m assuming that you are running a freelance or small agency operation in the US. That means you are probably a sole proprietor or single-member LLC. Most of this article will still be useful even if you’re not, but just wanted to make sure we were clear on that point first!

With that in mind, I’ll now talk about how small business owners can create cash flow statements.

What is a Cash Flow Statement?

A cash flow statement is one of the three most important financial statements, alongside the income statement (or P&L) and the balance sheet. The purpose of your cash flow statement is simple – show you where money came from and where it went within a given period of time.

It’s easy to get this confused with the income statement, but that’s a mistake you will want to avoid. Income statements tell you how much money you’re making and whether you’re making a profit. Cash flow statements tell you what you’re doing with that money.

Think of it this way – if you were working a traditional 9-to-5 job, you could have a high salary but nothing in the bank. Cash flow statements help you avoid falling into the freelancer and small agency owner equivalent of this trap – high profitability, no cash.

Empty wallet
The cashier bagging your groceries doesn’t care what your net income is if your cash flow is poor!

In general, you want to see a neutral or positive cash flow over time. That is, unless you are specifically trying to reduce the amount of cash on hand for strategic reasons such as investing.

1. Prepare your financial records.

In order to create a cash flow statement, you need to keep track of all your revenues and expenses. I’ve put together a guide on how to do that here. If you’re still getting used to good recordkeeping, that’s a great place to start!

Suffice it to say, you need to keep an accurate log of your transactions in order to create useful cash flow statements. That includes keeping invoices, receipts, bank statements, and any other documentation you may need. This will help you correctly categorize expenses, which is a prerequisite for making a cash flow statement.

This will hold true whether you manually create your cash flow statement in an Excel template or create it using the reporting tools of common accounting software like QuickBooks.

2. Create your cash flow statement.

If you are using modern accounting software, creating a cash flow statement will be easy. 

Here are some links to guides that can help you do that:

You can also make your statement in Excel; it’s just much harder than with common accounting software.

No matter how you choose to create your cash flow statement, you will see that cash flows are broken out into three sections. Here is a quick overview of what each means.

  • Operating Activities: These involve the primary functions of the business that generate revenue, such as sales of goods and services, and payments for operating expenses, wages, and taxes.
  • Investing Activities: This category includes transactions involving the purchase and sale of long-term assets, like property, plant, equipment, and investments in other businesses.
  • Financing Activities: These activities relate to changes in the size and composition of the equity and borrowings of the company. Examples include issuing and buying back shares, paying dividends, and obtaining or repaying debt.

I’ll talk about this in more detail in the following section.

3. Review your cash flow statement.

Once you’ve created your statement, you will want to review it section by section. Actively reviewing this, and other key statements, is a great way to keep track of small business finances.

In particular, what you want to do is compare your projected cash flows to actual cash flows. Is your bank balance going down when you expect it to go up? Are you sitting on a large pile of cash you didn’t expect?

As you review your statement, ask these questions and adjust your business strategy based on what you learn.

With that in mind, I’ll now go over the three main sections, based on different types of business activities – operating activities, investing activities, and financing activities – as well as the net cash increase for period and cash at end of period sections.

3.1. Operating Activities

Operating activities are the heartbeat of your freelance or agency business. These activities primarily focus on cash inflows from clients — the payments you receive for services rendered or, if applicable, products sold.

There are also cash outflows here as well, which include rent and utilities, salaries and other payroll expenses you may owe, and any other costs needed to run your business like software subscriptions.

You must track business expenses carefully here, as every transaction directly impacts your working capital.

One common situation you should be aware of – if your business has a high volume of receivables, you might feel profitable but still face cash shortages. 

3.2. Investing Activities

Investing activities include cash spent on or received from the purchase and sale of long-term assets. That includes assets like computers, office equipment, or even real estate. To be frank, investing activities are often sparse for freelancers and small agencies, but you need to track cash flow associated with them when you do them.

Let’s say you decide to upgrade your design software or buy new cameras – these transactions fall under investing activities. These activities show your business’s growth trajectory and financial commitment to future expansion. Or, put more simply, this is a case of “using money to make money.”

3.3. Financing Activities

Financing activities involve the flows of cash related to funding your business. This can include taking out loans, repaying debt, or changing the business’s equity structure through issuing new shares or buying back existing ones.

For many freelancers and small agencies, the most common type of financing activity is very simple – paying yourself!

Financing transactions reflect how you, as the business owner, inject or withdraw money from your business, affecting overall financial stability. Proper management of these activities ensures that the business does not compromise its operational funds or risk its long-term viability.

3.4. Net Cash Increase For Period

Toward the bottom of your cash flow statement, you will see a section labeled “net cash increase for period” (or something similar depending on the software you use).

The net cash increase for the period gives you a snapshot of your business’s cash flow health over a specific timeframe. To calculate it, you subtract the period’s opening cash balance from the closing balance.

A positive number indicates a net increase in cash, suggesting good financial health. A negative number suggests you’re burning cash faster than you make it.

This figure will help you tell how well your business is managing its cash flow and decide whether your operational adjustments are yielding the financial outcomes that you’re hoping for.

3.5. Cash at End of Period

This figure is very simple – it’s the sum total of all the cash you have available at the close of your reporting period. This is useful for planning upcoming expenses and investments, as well as for simply making sure you have enough cash on hand.

Don’t overthink this figure – if it’s lower than you want it to be, come up with ways to save cash over the next quarter or two. If it’s considerably higher than you expect, consider investing it in a way that will grow the business.

4. Standardize your cash management processes.

If you haven’t already, it’s a good idea to consider standardizing your cash management processes. There are three parts to this:

  1. Keep up-to-date records so you can run financial statements any time you need them.
  2. Set a benchmark for desired cash on hand. (A good rule of thumb is to have enough to cover 90 days of expenses.)
  3. Make a habit of regularly reviewing your cash flow statements and bank records in general, perhaps on a monthly basis.

There are a bunch of ways you can do this, but the most important point is to get into a regular routine that you can keep up. If you spend enough time reviewing your finances, you’ll spot problems early and feel compelled to address them before they escalate.

You don’t want to get caught off-guard by cash flow issues. Make time for financial reviews!

Practical Limits of Cash Flow Statements in Freelance & Agency Businesses

While understanding cash flow statements is an important part of financial literacy, you should also know their limitations as well. To put it simply, they may not be as useful for freelancers and small agencies as they are for larger businesses.

If you don’t have a lot of long-term assets, most of your cash flows will fall into operating activities and financing activities. And most – if not all – of your financing activities, assuming you are a sole proprietor or single-member LLC, will come in the form of “Owner Pay.”

That means for a lot of business owners, the cash flow statement will basically take your net income from your income statement and put that under operating activities, and then put your own personal pay under financing activities, with net cash at the bottom.

Cash flow statements look backward in time. For businesses with a lot of earners and spenders, it’s necessary to have a statement like this to wrangle all of their disparate data into a cohesive story.

But for the freelancer or small agency owner? Standard cash flow statements are useful for making sure you’re not taking too much from the business on a regular basis. But beyond that, use cases are limited. The main reason to know how to run one now is so that you’re prepared if your business scales up later.

In my opinion, it is much more useful to focus on cash flow forecasting, which is concerned with when money will come in and go out in the near future. There are no standard financial statements for this. Think about how useful it would be to be able to predict your bank balance in advance!

Final Thoughts

When you understand how cash flow statements work, you can use them to help gauge the overall financial health of your business. Understanding the different types of cash flow, in particular, can help you understand if you’re spending your money wisely.

Regardless of the size of your business, it’s a good idea to periodically check your cash flow statements and make sure everything looks good. In general, cash flow should trend upward, unless you have a good reason for this not to be the case. Keeping an eye on your statements can help you make sure that happens.

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