Wtf Is A Cash Flow Statement & How Do I Make One?


I was recently talking with some small businesses about creating the financials for a business plan that was to be pitched to investors. What started out as a conversation about cash flow turned into a conversation about revenue and cash collection projections.

What is happening here is that entrepreneurs do not know the correct finance and accounting terms. Since they do not know the correct terms, they spin their wheels Googling how to create the financials they need. 

So let’s get terminology out of the way. Then we can talk about how to get to that sweet, sweet cash collected number. Ok?

The financials you need for your business plan are an income statement, a cash flow statement and maybe a balance sheet.

The income statement shows your company’s revenue and expenses. It is based on accruals, which means that you earn the revenue when the service is delivered or available to the customer or the good is handed over to the customer. It doesn’t matter when the sale closed or when you had to pay for an expense. Just forget about that for now. All that matters on the income statement is the period that you deliver on the sale or use the expense.

What do I mean? Here are a couple of examples:

Example 1: You have a consulting business and in December a client signs a contract to work with you for 6 months. You are charging $5,000 a month. You start to work with the client on January 1st and get paid for January on February 2nd.

Revenue for your income statement is $5,000 a month for January through May. Closed sales in December is $60,000.

Example 2: You are selling wine gift boxes on your website that are to be delivered to customers before Christmas time. You get orders for $2,000 in October, $3,000 in November and $5,000 in December. You ship all of the orders on December 15th to arrive on time for Christmas.

Your revenue for October is $0, your revenue for November is $0 and your revenue for December is $10,000. This is because it does not matter when you receive the orders or the cash in the bank, what matters is when the good is provided to the customer.

For the cash flow statement all you care about is cash collected from customers and the day the cash spent on expenses goes out. The dates the cash comes in or goes out is the only important thing.

Here are a couple of cash flow statement examples using the same examples as above.

Example 1: December $0, January $0, February $5,000. This is because for cash flow we only care about the cash collected. Neither the date the contract was signed, nor the month that the invoice was due matters.

Example 2: October: $0, November $0, December $10,000. This is assuming that your credit card processor turns around payments quickly. What I have seen is a direct deposit in your bank account will happen between 2 and 5 business days, but you will need to work that out when you sign up with them.

I think that a balance sheet is not very useful for many startup businesses. It only matters if you have assets, for example inventory, cars, or other large ticket items that you own, or debt, for example loans. If you have investors you will also need to keep track of the amount of money that your investors have given to you, which is called paid-in-capital, but let’s not get into that here because because it is more complicated.

All you need to know about the balance sheet is that is a snapshot at a given moment of all of your assets, including cash in the bank plus inventory and other owned things, and your debts or money that you owe, which is called liabilities.

In my opinion the balance sheet is not important for most small businesses, unless you have a lot of assets other than cash or debt. It is too technical and doesn’t help you to manage your business, which should be focused on making sales, collecting cash and managing expenses.

Cash management is the most important part of a small business. Literally. The. Most. Important. No Cash = No Business.

Ok, so now that we have gotten through the boring technical-yet-super-important-part, let’s talk about how you figure out just how much money you are going to make.

The key to this is use comparables. I have heard people say that since it is impossible to know how much money you will make you have to guess.

No. This is wrong. There are many ways to estimate revenue and cash flow but guessing is NOT one of them.

Making educated guesses, on the other hand, is exactly what you need to do. Here we use information gathered from other companies that are similar in some way to yours and analyze it. Once we have analyzed the other companies’ info we can make educated guesses about how our revenue will turn out.

Making educated guesses to figure out how much money you are going to make.

Step 1: Find comparable companies.

You probably already know a few competitors in your space. Make a list of those companies and also use google to come up with a list of comparable businesses.

Step 2: Gather data on comparable companies and analyze it

Open up Excel, Google Sheets, Numbers, Openoffice or whatever spreadsheet program that you have.

Create columns for the info you are collecting. Depending on the companies that you are looking at, the info may be different. I think it is great to start out with the following if you can get it:

  • Year established - this may be on their website, LinkedIn, or you can estimate it by going to and searching for the company’s website and getting the creation date.
  • Revenue - you will find this on the income statement. Can’t get an income statement for the companies, try to google it. There may be press releases or news websites that estimate their revenue.
  • Cost of Goods Sold - see income statement
  • Expenses - see income statement
  • # of users or clients - google “company name + number of users/clients” for each company.
  • # of visitors to their website - check out to figure out how many people are visiting their site each month.
  • Conversion rates - Google conversion rates for the particular companies and industry rates. You would be surprised how much data companies will give away.
  • Other metrics for your industry - Google “your industry + metrics” to add in other column fields.

Create rows for each comparable company and start filling out the data. The best way to look at this type of data is over time. Try to get as far back as possible and start there. I like to use Year 1 as the first year the company was in business as opposed to 2012 or whatever year because then you are comparing different years for companies. In theory a company that has been around longer will have more revenue, users, etc. Focusing on the year established helps you to compare apples to apples.

Now you will likely start to see patterns in: how long it took to get a decent amount of customers, how the revenue grows, seasonality (if you look at months or quarters).

Highlight the lowest performers and the highest performers for each columns. These are your company’s upper and lower limits for your projections.

Step 3: Start projecting your company’s revenue and cash

Now that you have the similar companies’ info you can start making assumptions about your own business. Start by answering these questions:

-How does my company compare to the lowest performer? The highest performer?

-What are the differences? What are the similarities?

-Start filing in the columns for your own business based on your answers. Remember to justify why your company will do better or worse than those that you have analyzed.

Estimating revenue and cash flow is an iterative process. It takes time and in the beginning that only thing that you have to go on is what someone else has done. Once your business starts moving along you can start to use your own history as an indicator to base your assumptions upon.