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Your cash flow statement tells you how much cash the business has gained or lost in the year and why. Start with your net profit.? Deduct all non cash items (such as depreciation) from the net profit. The total represents net cash profit. Now look at your balance sheet and calculate the difference between last year and this year?s closing balances. Decide if there has been a cash outflow or a cash inflow for each difference.? Outflows are increases in assets and decreases in liabilities. Inflows are decreases in assets (fixed assets, stock and debtors) and increases in liabilities (long term loans).? Remember, you have already deducted depreciation from your net profits, so you need to exclude it from your increases or decreases in fixed assets to get to the cash element of the increase or decrease. If you start your cash flow calculation with last year?s cashbook balances (bank balance plus petty cash and savings), add all the inflows including cash profit and deduct all the outflows including cash losses, the total should give you this year?s cashbook balances.? This is useful information to ensure you have enough cash coming into your business to pay all the money owed by you on time. Profits don?t always turn into cash, as we have all experienced bad debt in business.? By making sure you can pay the money you owe, you?ll avoid the main reason for business failure.? You can also plan to take on additional finance you may need to top up your cash, but make sure your business is generating enough to make the repayments. A good test is to see how many times your net profit before interest will cover your interest cost for the year.? It needs to be a good few times to make sure your business is safe from cash burn.? You can discuss this with a professional accountant. |