Accurate and up-to-date cash flow statements are essential for both large and small businesses. The good news is that you don’t need to be an accounting guru to grasp the fundamentals of this financial principle.

Read on to learn everything you need to know about cash flow statements, how they’re prepared, and why they’re important. We’ll also share an example of a cash flow statement to bring the concept to life and provide some tips for SaaS businesses seeking to simplify and streamline their cash flow statement activities.

After that, we’ll explore how Baremetrics’ business metrics monitoring and analytics solution can help SaaS businesses track their subscription revenue accurately and immediately, allowing for effortless and stress-free cash flow management.

Sign up for the Baremetrics free trial today.


What is a cash flow statement?

A cash flow statement shows you how much cash is entering and leaving your business over a given period. Cash flow statements complement other financial statements, including the balance sheet and income statement.

The key components of cash flow statements are cash from operating activities, investing activities, and financing activities.

A cash flow statement measures how effectively a company generates and manages its cash to ensure it can pay its debts and fund all its operating expenses. It also gives investors a sense of how smoothly a business’s operations are running, the sources of its income, and how money is being spent.


How do cash flow statements work with income statements and balance sheets?

You can create a cash flow statement by pulling information from your income statement and balance sheet.

An income statement provides a breakdown of all the funds that have entered and left your business.

The balance sheet shows the impact of those transactions on different business accounts, such as accounts payable and receivable and inventory.

Bear in mind that cash flow statements differ from income statements and balance sheets because they don’t include details of any future incoming and outgoing funds that have been recorded on credit. Cash flow statements only show details of cash that’s actually been received or sent out.

So, in financial terms, “cash” isn’t the same as net income or net earnings, which is the value of sales less the cost of goods sold; selling, administrative, and operating expenses; depreciation; interest and taxes; and any other expenses.


Example cash flow statement

Take a look at the example below: Amazon’s 2016 statement of cash flow.

The areas highlighted in orange show the company’s total change and end-of-period cash position.

Figure 1. Amazon’s Statements of cash flow for 2014–2016. Source: amazon.com

Figure 1. Amazon’s Statements of cash flow for 2014–2016. Source: amazon.com


What does a cash flow statement tell you about your business?

A cash flow statement helps you determine your enterprise's overall strength, profitability, and long-term viability.

It helps you gauge your level of liquidity, or, in other words, whether you have sufficient cash to pay your expenses. Shareholders and investors look closely at a company’s cash flow statements and use them to determine the organization’s overall financial health.

Cash flow statements also provide a means to predict your future cash flow, which is helpful for budgeting. In addition, if you have your sights set on applying for a loan or a line of credit, you’ll need to provide up-to-date financial statements to your lender.

You may think that the more cash you have on hand, the better. However, sometimes a negative cash flow can result from a period of growth or expansion—activities which could lead to more revenue and profits in the long term.


How to calculate cash flow

To accurately determine your company’s cash flow, you can follow either the direct or indirect method. While both options are permitted by the generally accepted accounting principles (GAAP), many small businesses find the indirect method preferable. We’ll explain why later in this section.

 

1. Calculating cash flow with the direct method

If you use the direct method, you’ll need to keep records of all cash as it enters and leaves your business. This will include cash paid to suppliers and employees in the form of salaries and cash received from customers. At month’s end, you’ll use this information to prepare a statement of cash flow.

This approach is more time-consuming than the indirect method as you’ll need to diligently record and track every transaction on an ongoing basis and retain all your cash receipts.

What’s more, even if you use the direct method, you’ll still have to use the indirect method to reconcile your cash flow statements with your income statements, which introduces an additional administrative burden.


2. Calculating cash flow with the indirect method 

With this method, you calculate your cash flow from operating activities by first deducting your net income from your company's income statement. Because businesses’ income statements are prepared on an accrual basis, revenue is only recognized when it’s earned, as opposed to when it’s received.

When you use the direct method to calculate your cash flow statement, you’ll also need to review all the transactions that have been recorded on your income statement and then reverse certain ones to determine your working capital. So, you’re effectively eliminating any transactions that didn’t involve the movement of cash.

What kind of items wouldn’t be included? A good example is depreciation. It’s not really a cash expense but rather an amount deducted from an asset’s previously recorded total value.

This approach is obviously far simpler than the direct method, which is why many small business owners opt to go this route.


3. Benefits of cash flow planning for SaaS businesses

Good cash flow planning is invaluable for any company, and subscription-based businesses are no exception. Here are a few specific benefits for your SaaS business:

  • If you can accurately visualize and track your expenses, you’ll be able to quickly identify any inconsistencies and eliminate unnecessary expenses, ultimately increasing your profit.
  • Having a clear line of sight into your liquidity parameters gives you the information you need to optimize your outgoing and incoming money streams.
  • It also paves the way for more informed business decisions based on fact rather than speculation and allows you to better plan your expenses for the months ahead.


Baremetrics is the obvious choice for SaaS businesses 

Get deep insights into MRR, churn, LTV and more to grow your business


SaaS-specific cash flow problems

There are several persistent cash flow-related problems that most SaaS business owners face from time to time. Let’s look at some of them.


1. Balancing immediate expenses with payment delays

Depending on your business model, your customers’ credit terms may extend to 30 or 60 days. All too often, however, you’ll have bills that need to be paid immediately or within a few weeks, which can upset your cash flow. For this reason, it’s a good idea to set up an upfront payment structure for customers wherever possible.


2. Multiple debtors and late payments

The issue of customers not paying you on time creates problems on two levels. Not only are you failing to receive the revenue due to you, but you’re also incurring expenses in delivering your services. That’s why it’s sensible to set up an automated billing mechanism to ensure your customers pay you on time.

Automating reminders to customers to alert them of the upcoming billing cycle is also helpful in reducing the chance of payments failing. If customers’ payments don’t go through (due to expired credit cards, insufficient funds, or other bank issues), you can immediately restrict their access to your software until the payment is recovered.


3. Customer churn

As SaaS businesses are inherently subscription-based, when a customer stops using your software or doesn’t renew their subscription, it’s going to negatively impact your cash flow and liquidity.

You should be as proactive as possible about avoiding or reducing customer churn. Look to advanced analytics solutions, such as the one offered by Baremetrics, to understand which customers you’re losing and why, and then move quickly to take countermeasures. The higher your customer retention rate, the better your longer-term cash flow will be.

Sign up for the Baremetrics free trial and start managing your subscription business right.

 

4. Too few new customers

While it’s important to invest time and energy on retaining your existing customers, you should always be on the hunt for new ones. This will help offset the impact of any customer churn and sustain your cash flow and overall business viability. This is where sales, marketing, and brand awareness efforts come into play.


Getting on the front foot with Baremetrics 

If you’re still using spreadsheets and basic dashboards to monitor and manage your cash flow, you’re not only operating inefficiently, but you’re also probably leaving money on the table.

Baremetrics’ advanced analytics and reporting tools offer an affordable, fast, and flexible means to ensure you stay on top of and optimize your SaaS business’s cash flow. 

Our platform does all the heavy lifting for you, intelligently “automating away” meaningless numbers to uncover the true, bigger picture. A crystal-clear dashboard gives you a holistic view of your expenses, profit, and forecasted cash flow for specific timeframes. All this allows you to quickly spot inconsistencies, eliminate unnecessary waste, and more accurately model your SaaS business’s future based on multiple scenarios.

Figure 2. Example cash flow dashboard.

Figure 2. Example cash flow dashboard.


You can also access deep insights about precisely who your customers are, forecast revenue into the future, and quickly and automatically recover failed payments.

These are some of the cash flow-related metrics that Baremetrics allows you to track and view.

Active customers/subscriptions: Users who are currently paying to use your product (excluding anyone who is on a free trial or plan or is delinquent).

Figure 3. Example active subscriptions dashboard.

Figure 3. Example active subscriptions dashboard.


Monthly recurring revenue (MRR): The amount of revenue you get from your customers on a monthly basis. Tracking and analyzing your MRR and understanding the different sources of your revenue give you a snapshot of the overall health of your business.

Figure 4. Example MRR

Figure 4. Example MRR


Annual run rate (ARR): ARR is your monthly recurring revenue (MRR) annualized. It gives you a sense of how much revenue you can expect to bring in over the period of a year based on your current MRR.

Average revenue per user (ARPU): This is the average amount of revenue that you receive from each active customer over the period of a month.

Churn: Churn is understood as the percentage of customers or the revenue you lose over a certain period.

Figure 5. Example churn dashboard.

Figure 5. Example churn dashboard.


Customer lifetime value (LTV): An estimate of the revenue you can expect to make from the average customer before they churn. SaaS companies use LTV to calculate how much they should reasonably invest in acquiring a new customer.

Quick ratio: This number gives you insight into how effectively your business is growing, given its current revenue and churn rates.

 

How can we help?

Baremetrics is the obvious choice for SaaS businesses seeking to better track and manage their cash flow and make informed, fact-based investment decisions.

If you’re looking for a smarter way to approach your SaaS business’s cash flow, get in touch or sign up for the Baremetrics free trial today.