The amount of money that your business has on hand at the beginning of each accounting period is related to the earnings reflected on your income statement, but the formulas for calculating these two numbers aren't exactly the same. Your income statement tells you how much profit you've earned, but your cash flow statement uses formulas to show how much capital you actually have to work with, once you figure in items that don't appear on your income statements, such as loan payment expenditures and incoming cash from capital financing.
TL;DR (Too Long; Didn't Read)
The amount of cash you'll have available as the beginning cash balance for each subsequent period covered by your cash flow statement is the amount you have left over at the end of the previous period. If your total cash on hand at the beginning of January was $10,000, and you spent $9,000 on business expenditures during the month, you'll have $1,000 left over to start the following month.
The Formula for Beginning Cash Balance
To calculate your beginning cash balance for a cash flow statement, add all of the sums of capital available to your business at the beginning of the period covered by the statement. Include cash in the bank and cash on hand, whether these sums came from sales or loans. This figure represents the amount you have available at the very beginning before the accounting period actually begins.
The Formula for Total Cash on Hand
Each column in your cash flow statement represents an accounting period such as a month or a quarter. The formula for your beginning cash balance at the start of the earliest period covered by the statement shows how much money you have going into the period represented by the very first column. It is the result of business activities that occurred prior to the time period covered by the statement. But you'll have more money than this to work with during the first month or quarter because your company will earn and collect money during this time. You may also have sources of cash that aren't directly connected to earnings, such as capital infusions from loans. Your cash flow statement should have lines to represent every category of cash that may come in, such as retail and wholesale sales, rental income and business loans. To calculate the total cash available for the accounting period, add the opening cash to the sum of these entries for incoming cash.
Beginning Cash Formulas for Subsequent Period
The amount of cash you'll have available as the beginning cash balance for each subsequent period covered by your cash flow statement is the amount you have left over at the end of the previous period. If your total cash on hand at the beginning of January was $10,000, and you spent $9,000 on business expenditures during the month, you'll have $1,000 left over to start the following month. Simply transfer the available cash balance at the end of January to the field for starting the cash balance for February.
Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.