The cash flow statement

25 min

The dangerous month

The SACCO's loan officer has one more question for Uwase: "Your profit is good. But can you pay us every month?" An agro-input shop has an awkward year. Uwase must buy seed and fertiliser weeks before farmers come to buy it for the planting season, and many farmers' cooperatives pay a month later. So cash can run short in exactly the months when business is best.

Profit cannot show this, because it is measured over the whole year. A cash flow statement follows the money itself, month by month, and shows whether the business will have cash in the bank when a bill or a loan repayment falls due.

Definition

Cash inflow, cash outflow and net cash flow: a cash inflow is money actually received (cash sales, money from debtors, a loan, the owner's new capital); a cash outflow is money actually paid out (for stock, wages, rent, assets, loan repayments, drawings). Net cash flow is inflows minus outflows for the period:

\text{closing balance} = \text{opening balance} + \text{inflows} - \text{outflows}

A positive closing balance is a surplus; a negative one is a deficit, which must be covered by an overdraft, a loan or cutting spending.

Example: a credit sale in July paid for in August is an August inflow.

Three kinds of cash flow

Activity	What it covers	Examples in Uwase's shop
Operating	The day-to-day trading of the business	Cash sales; receipts from debtors; payments for stock, wages, rent, electricity; commission received
Investing	Buying and selling long-term assets	Fittings for the new shop; selling an old delivery van
Financing	Money from and to the owner and lenders	SACCO loan received; loan repayments; new capital; drawings

This lesson uses the direct method, which lists the actual receipts and payments. (The indirect method, used by large companies, starts from the profit figure and adjusts it; it is beyond this course.)

The month-by-month format

For planning, a small business sets out its cash flow in columns, one per month. The rows follow a fixed pattern:

Start with the balance b/d (the cash at the start of the month).
Add each inflow, and total them with the balance b/d: total (A).
List each outflow and total them: total (B).
Subtract: $\text{balance c/d} = A - B$ .
Carry the balance c/d across as the next month's balance b/d.

Definition

Cash flow forecast (or cash budget): a cash flow statement prepared in advance, for coming months, from expected receipts and payments. It is the tool a lender asks for, because it shows whether future repayments can be met.

Example: Uwase's forecast for July to October 2026 shows whether she can afford the new shop.

Tip

Follow the money, not the invoice. For each item ask: in which month does cash actually move? A credit sale goes in the month the customer PAYS; a purchase on credit goes in the month the supplier is PAID. Items with no cash at all, such as closing stock or goods the owner takes, never appear.

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Worked example 1: Uwase's cash flow forecast, July to October 2026

Information (illustrative): cash at 1 July 2026 is Frw 2,455,000 (bank 2,310,000 plus cash 145,000, from the balance sheet). The June debtors (Frw 1,150,000) pay in July and the June creditors (Frw 1,640,000) are paid in July. Credit sales are paid a month later: July 400,000, August 800,000, September 900,000. July's rent was paid in advance in June; from August rent is Frw 100,000 a month. The new shop opens in September with rent of Frw 80,000 and a worker at Frw 120,000 a month. The SACCO lends Frw 5,000,000 in August, repaid at Frw 250,000 a month from September, on top of Frw 90,000 a month on the bank loan. Commission is Frw 20,000 a month and drawings are Frw 150,000 a month.

Uwase Agro-Inputs: cash flow forecast, July to October 2026 (Frw)
Details	July	August	September	October
Cash inflows
Balance b/d	2,455,000	215,000	2,065,000	3,465,000
Cash sales	1,200,000	2,600,000	3,400,000	1,500,000
Receipts from debtors	1,150,000	400,000	800,000	900,000
Commission received	20,000	20,000	20,000	20,000
SACCO loan		5,000,000
Total inflows (A)	4,825,000	8,235,000	6,285,000	5,885,000
Cash outflows
Purchases of stock	2,500,000	3,200,000	1,800,000	900,000
Payments to creditors	1,640,000
Wages	200,000	200,000	320,000	320,000
Rent		100,000	180,000	180,000
Electricity	30,000	30,000	30,000	30,000
Fittings for the new shop		2,400,000
Loan repayments	90,000	90,000	340,000	340,000
Drawings	150,000	150,000	150,000	150,000
Total outflows (B)	4,610,000	6,170,000	2,820,000	1,920,000
Balance c/d (A − B)	215,000	2,065,000	3,465,000	3,965,000

July, step by step. (A) $2,455,000 + 1,200,000 + 1,150,000 + 20,000 = 4,825,000$ . (B) $2,500,000 + 1,640,000 + 200,000 + 30,000 + 90,000 + 150,000 = 4,610,000$ . Balance c/d $4,825,000 - 4,610,000 = 215,000$ , which becomes August's balance b/d.

Interpretation. Every month ends in surplus, but July ends with only Frw 215,000, less than two weeks of wages, stock and repayments. If a cooperative paid late, or fertiliser prices rose, July would go into deficit. Uwase could ask her suppliers for a month's credit on July's stock, or arrange a small overdraft in advance. The loan officer can also see that the new repayments of Frw 250,000 a month are covered from September.

Worked example 2: a year's cash flow by activity

Ikaze Café, Kigali, had Frw 350,000 of cash on 1 January 2025. During 2025 it received Frw 9,800,000 from customers and paid Frw 5,100,000 to suppliers, Frw 1,800,000 in wages and Frw 900,000 in rent and other expenses. It bought a new coffee machine for Frw 2,500,000 and sold the old one for Frw 400,000, borrowed Frw 1,500,000, repaid Frw 300,000 and the owner drew Frw 900,000. (Illustrative.)

Ikaze Café: cash flow statement for the year ended 31 December 2025 (direct method)
Details	Frw	Frw
Operating activities
Cash received from customers	9,800,000
Cash paid to suppliers	(5,100,000)
Wages paid	(1,800,000)
Rent and other expenses paid	(900,000)
Net cash from operating activities		2,000,000
Investing activities
Purchase of a new coffee machine	(2,500,000)
Sale of the old coffee machine	400,000
Net cash used in investing activities		(2,100,000)
Financing activities
Loan received	1,500,000
Loan repaid	(300,000)
Drawings	(900,000)
Net cash from financing activities		300,000
Net increase in cash		200,000
Cash at 1 January 2025		350,000
Cash at 31 December 2025		550,000

Checks. Operating: $9,800,000 - 5,100,000 - 1,800,000 - 900,000 = 2,000,000$ . Investing: $400,000 - 2,500,000 = - 2,100,000$ . Financing: $1,500,000 - 300,000 - 900,000 = 300,000$ . Net increase: $2,000,000 - 2,100,000 + 300,000 = 200,000$ ; closing cash $350,000 + 200,000 = 550,000$ .

The layout tells a story: day-to-day trading produced Frw 2,000,000 of cash, which (with the loan) paid for the new machine.

Warning

Cash is not profit, and profit is not cash. The SACCO loan of Frw 5,000,000 is a cash inflow but NOT income: it must be repaid, so it never appears in the income statement. The new shop's fittings are a cash outflow but NOT an expense. Also check that each month's balance b/d equals the previous month's balance c/d; one wrong carry-forward spoils every later month.

FOG Accountancy Tutorials, "The Cash Budget (Part 1)". A month-by-month cash flow forecast is also called a cash budget. Watch how receipts and payments are placed in the month the cash actually moves, and how each closing balance becomes the next opening balance.

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Practice

Define a cash flow statement and give two reasons why a small business should prepare one.
Classify each cash flow as operating, investing or financing: (a) cash received from customers; (b) buying a motorcycle for deliveries; (c) a loan received from a bank; (d) wages paid; (e) the owner's drawings; (f) selling old equipment.
Credit sales are January Frw 600,000, February Frw 750,000 and March Frw 500,000, and customers pay one month later. How much cash is received from debtors in February and in March?
Opening cash on 1 January is Frw 800,000. Each month there are cash sales of Frw 1,500,000, and payments for purchases Frw 900,000, wages Frw 350,000 and rent Frw 200,000. In February equipment is bought for Frw 1,200,000 cash. Prepare a cash flow statement for January to March.
In your answer to question 4, which months end in deficit? Suggest two ways the owner could avoid the deficit and evaluate each.
Explain why Uwase's SACCO loan of Frw 5,000,000 appears in her cash flow forecast but not in her income statement.
Look at Uwase's forecast in Worked example 1. Analyse what would happen to July's closing balance if the June debtors paid only half of what they owe in July.

Show answersHide answers

A statement of the cash received and paid by a business over a period, from the opening to the closing cash balance. Reasons: to see cash shortages before they happen; to plan when to buy stock or assets; to show a lender that repayments can be met; to control spending.
(a) Operating; (b) investing; (c) financing; (d) operating; (e) financing; (f) investing.
February: Frw 600,000 (January's credit sales). March: Frw 750,000 (February's).
January: (A) $800,000 + 1,500,000 = 2,300,000$ ; (B) $900,000 + 350,000 + 200,000 = 1,450,000$ ; c/d 850,000. February: (A) $850,000 + 1,500,000 = 2,350,000$ ; (B) $1,450,000 + 1,200,000 = 2,650,000$ ; c/d $- 300,000$ . March: (A) $- 300,000 + 1,500,000 = 1,200,000$ ; (B) 1,450,000; c/d $- 250,000$ .
February (deficit of Frw 300,000) and March (deficit of Frw 250,000). Options: delay the equipment purchase to a later month, which removes the deficit but may delay the benefit of the equipment; buy the equipment on credit or in instalments, which spreads the cost but may add interest; arrange an overdraft, which covers the gap quickly but costs interest; the owner adds capital, which costs no interest if she has the money. Each month's trading makes only Frw 50,000, so the business also needs to raise sales or cut costs.
The loan is money that must be repaid, not income earned by trading, so it does not increase profit. But it is real cash received in August, so it is a cash inflow. Only the interest on the loan is an expense.
July's receipts from debtors fall by $\frac{1{,}150{,}000}{2} = 575{,}000$ , so July's closing balance becomes $215,000 - 575,000 = - 360,000$ : a deficit. She could not pay all July's bills without an overdraft or a delay in buying stock, which is why the forecast is useful before the season starts.

1The dangerous month

2Three kinds of cash flow

3The month-by-month format

The dangerous month

Three kinds of cash flow

The month-by-month format