![]() Using the direct method, you keep a record of cash as it enters and leaves your business, then use that information at the end of the month to prepare a statement of cash flow. The direct method of calculating cash flow While generally accepted accounting principles (US GAAP) approve both, the indirect method is typically preferred by small businesses. ![]() In order to figure out your company’s cash flow, you can take one of two routes: The direct method, and the indirect method. Statements of cash flow using the direct and indirect methods They’ll make sure everything adds up, so your cash flow statement always gives you an accurate picture of your company’s financial health. The most surefire way to know how much working capital you have is to hire a bookkeeper. Keep in mind, with both those methods, your cash flow statement is only accurate so long as the rest of your bookkeeping is accurate too. ![]() If you use accounting software, it can create cash flow statements based on the information you’ve already entered in the general ledger. If you do your own bookkeeping in Excel, you can calculate cash flow statements each month based on the information on your income statements and balance sheets. Positive cash flow isn’t always positive overall. While it gives you more liquidity now, there are negative reasons you may have that money-for instance, by taking on a large loan to bail out your failing business. Keep in mind, positive cash flow isn’t always a good thing in the long term. When you have a positive number at the bottom of your statement, you’ve got positive cash flow for the month. For example, early stage businesses need to track their burn rate as they try to become profitable. It’s important to remember that long-term, negative cash flow isn’t always a bad thing. When your cash flow statement shows a negative number at the bottom, that means you lost cash during the accounting period-you have negative cash flow. On top of that, if you plan on securing a loan or line of credit, you’ll need up-to-date cash flow statements to apply. That’s important for making long-term business plans. You can use cash flow statements to create cash flow projections, so you can plan for how much liquidity your business will have in the future.
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