The statement of cash flows for your business is necessary to monitor the inflow and outflow of cash for operations, financing and investing. Additionally, banks want to see your statement of cash flows before giving your business a credit line or traditional loan. The cash flows of your sole proprietorship tells outside institutions how much money you actually have on hand.
The statement of cash flows for your sole proprietorship shows all inflows and outflows of cash from your business. Unlike the income statement, which shows income for services even when you have yet to receive payment, the statement of cash flows incurs inflows and outflows only when you actually earn or spend the money. For example, if you sell a service to a customer for $1,000 and she does not pay for that service until the next fiscal year, the cash flows for her account is $0 for the current fiscal year.
Operating activities for your sole proprietorship that appear on your statement of cash flows include money received from your customers, expenses for wages, inventory and overhead, and any money spent on income taxes. All of theses activities are included on the statement of cash flows as they occur. For example, as a sole proprietor you may know what you plan to pay an employee for the entire year, however, you cannot report this cash outflow until the money is physically transferred to the employee. Only at the end of the fiscal year could you list the employee's entire annual salary as a cash outflow.
Any money you spend for your business to maintain, update or expand infrastructure is considered an investing activity on your statement of cash flows. For example, if you make wooden furniture, and you need to purchase an electric sander to increase turnaround time for business expansion, you include this expenditure as an outflow of cash. If your business owns any equipment or real estate and you decide to sell the items, this is considered an inflow of cash from investing activities. As a sole proprietor, your business cannot typically spend cash on investments like securities or bonds, therefore any personal investments are not included on your statement of cash flows.
The financing section of the statement of cash flows is usually reserved for cash inflows and outflows from stock sales and dividend payments, respectively. Because your sole proprietorship cannon issue stock to investors, your financing section will mostly include any payments made for business loans. For example, if you take out a $100,000 business loan during the fiscal year, your inflow of financing cash is $100,000. If you make $10,000 in payments for the loan during the year, your outflow of financing cash is $10,000, resulting in a positive $90,000 for the year.
Your sole proprietorship does not report to shareholders, so you do not need to prepare your statement of cash flows as if it was a professional presentation document. Typically, the statement of cash flows has simple headings for "Operating Activities," "Investing Activities," and "Financing Activities." At the bottom of the document, the net increase or decrease of cash flows is calculated and added to beginning cash flows for the fiscal period.
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