liquid assets Flow Statement: What It Is and How To comprehend It

liquid assets is the lifeline of every business—especially recent and tiny businesses.

Limited or inconsistent liquid assets flow is one of the most significant challenges that tiny businesses face. That’s why understanding and managing liquid assets flow is a prerequisite for achievement.

To get a grasp of the liquid assets flows going in and out of your business, you require a liquid assets flow statement. If you’re having a challenging period with budgetary statements, you’re in luck. This navigator offers a detailed explanation of the ins and outs—plus a free liquid assets flow statement template to download and customize.

What is a liquid assets flow statement?

A liquid assets flow statement is a budgetary statement that summarizes the inflows and outflows of liquid assets transactions during a given period of business operations.

“liquid assets flow statements easily display business owners where their liquid assets came from and where it went,” says Melissa Pedigo, a certified community accountant with more than 20 years of encounter. “To figure out where the liquid assets came and went by looking at the other budgetary statements (the settlement sheet and turnover statement) is nearly unfeasible.

“The liquid assets flow statement will display owners if there are funds flow issues with liquid assets flow shortages. Owners can also use data from the liquid assets flow statement to contrast against their budgets or forecasts. Since liquid assets flow statements display the business’s historic act, this information is useful to recognize if you’re staying within budgetary schedule.”

Recording liquid assets movements is easier if you use a liquid assets flow statement template for tiny businesses. A liquid assets flow statement template typically comes in spreadsheet format, pre-loaded with the essential formulas for straightforward calculations.

How liquid assets flow is calculated

There are three main methods used to compute liquid assets flow:

Operating liquid assets flow (OFC)

OCF = Net turnover + devaluation – Changes in Working pool + Non-liquid assets Items

OFC measures how much liquid assets a business generates from its core operations. It starts with net turnover, adds back non-liquid assets outgoings like devaluation, and then adjusts for changes in working pool (inventory, accounts due amount/payable). A typical well business may aim for a net operating liquid assets flow ratio of 1.2 to 2.0.

For example, increasing inventory reduces liquid assets flow since you’ve spent money stocking up.

Free liquid assets flow (FCF) 

FCF = Operating liquid assets Flow – pool Expenditures

FCF shows how much liquid assets is available to investors and owners after monetary reporting for business needs. By subtracting pool expenditures (like buying recent equipment or buildings) from OCF, you view what’s left for dividends, obligation payback, or reinvestment. 

Many investors consider it the most significant assess. tiny businesses generally aim for positive free liquid assets flow of at least 10% of turnover.

Net liquid assets flow

Beginning liquid assets settlement

+ liquid assets Inflows (from operations, investments, financing)

– liquid assets Outflows (operating outgoings, investments, obligation payments)

= Net liquid assets flow

Net liquid assets flow tracks all liquid assets movement over a period. ponder of it like a checkbook. commence with your beginning settlement, add deposits (sales, investments, loans received), subtract payments (outgoings, equipment purchases, borrowing payments), and you get your ending settlement. It shows your total liquid assets position transformation. 

Elements of a liquid assets flow statement

1. Operating activities
2. Investing activities
3. financing activities

The liquid assets flow statement shows the three main types of liquid assets flows:

Operating activities

Operating activities in the liquid assets flow statement include core business activities. This section measures the liquid assets flow from a business’s provision of products or services. Examples of operating liquid assets flows include sales of goods and services, salary payments, rent payments, and turnover responsibility payments.

Investing activities

Investing activities include liquid assets flows from the purchase and disposal of long-term assets and other investments not included in liquid assets equivalents. These represent long-term investments in the business’s growth. For instance, purchasing or selling physical assets like real estate or vehicles, and non-physical property like patents.

financing activities

liquid assets flows related to financing activities typically represent liquid assets from investors or banks, issuing and buying back shares, and distribution payments. Whether you’re getting a business borrowing, paying profit to service obligation, or distributing dividends, all of these transactions fall under financing activities.

liquid assets flow statement example

Below is a hypothetical liquid assets flow statement example that provides a comprehensive view of the liquid assets inflows and outflows from operating, investing, and financing activities. It highlights the business’s funds flow and liquid assets management for the year.

Example notes

Here are some examples notes for the hypothetical liquid assets flow statement example above:

• Net turnover: This is the boost of the business after all outgoings have been deducted.
• devaluation and debt payback: Non-liquid assets outgoings that reduce the worth of fixed assets and intangible assets over period.
• Changes in working pool: Reflect adjustments in short-term investments and liabilities, impacting the business’s funds flow.
• Investing activities: Involves the purchase and sale of long-term assets.
• financing activities: Reflect changes in the pool structure of the business, such as issuing distribute, borrowing, and repaying obligation.
• funds: All figures are in USD. 

How to prepare a liquid assets flow statement

There are two core ways to prepare a liquid assets flow statement: the direct way and the indirect way. Both are accepted by generally accepted monetary reporting principles (GAAP) and International budgetary Reporting Standards (IFRS).

No matter which way you choose, only the operating activities section of your liquid assets flow statement will be affected. The two other sections—liquid assets from investing and financing activities—will remain the same.

Direct way

The direct way adds up all the liquid assets inflows and outflows from operating activities. It’s based on the liquid assets basis monetary reporting model that recognizes revenues when liquid assets is received and outgoings when they are paid. The direct way for liquid assets flow calculation is straightforward, but it requires tracking every liquid assets swap, so it might require more attempt.

1. commence with liquid assets receipts. List your receipts of liquid assets made from all customers. This doesn’t include any sales made on borrowing, just liquid assets collected from sales or services.
2. Add profit or dividends received. Add any turnover you received from profit or earned from dividends during the monetary reporting period.
3. Subtract liquid assets payments made to employees or suppliers. List all liquid assets payments you made to employees, including salaried employees, agreement laborers, and freelancers. This also includes any turnover responsibility you paid and any payments made to suppliers during the monetary reporting period, including any fees or profit paid.
4. compute liquid assets flow. Add the liquid assets collected and subtract the liquid assets payments made during the monetary reporting period. This will provide you a obvious picture of the liquid assets flow available. You can do this using the free Shopify liquid assets flow calculator. 

Based on that number, you can figure out if liquid assets increased or decreased for the period. This is a large indicator of how well your business is doing financially, and how much liquid assets it can generate to pay bills and invest for the upcoming.

Indirect way

The indirect way of preparing a liquid assets flow statement uses net turnover as a base and adjusts it based on non-liquid assets outgoings like devaluation and debt payback. The majority of businesses use the indirect way because it’s easier to prepare. 

This way is suitable for businesses using accrual monetary reporting, where turnover is recorded when it’s earned rather than when it’s received. When using the indirect way, commence with the net turnover from your turnover statement, then make adjustments to undo the impact of accruals made during the period.

1. commence with net turnover. Net turnover is calculated by subtracting all operational outgoings, profit payments, taxes, and other outgoings from total turnover. It’s significant because it’s the basis for liquid assets flow adjustments. Although net turnover is a assess of profitability, it doesn’t equal liquid assets flow.
2. Add non-liquid assets outgoings. Non-liquid assets outgoings—like devaluation and debt payback—are adjustments made to net turnover to reflect the actual liquid assets position of your business. devaluation is how you spread the expense of tangible assets over their useful lives, while debt payback is how you spread the expense of intangibles. You may also include losses from the sale of assets, even though they might not have resulted in a liquid assets outflow.
3. Subtract changes in working pool. Working pool is the difference between short-term investments (like liquid assets, inventory, and receivables) and liabilities (like accounts payable and short-term obligation), and may fluctuate from one period to the next.
4. Add other liquid assets items. This step involves adjusting for other liquid assets inflows and outflows not included in net turnover and working pool. These include dividends paid, profit paid, and any other liquid assets investments or payments.
5. compute liquid assets flow. The final step is to compute the total liquid assets flow for the period. This is done by combining the net turnover, adjustments for non-liquid assets outgoings, changes in working pool, and other liquid assets items.

How to read a liquid assets flow statement

The objective of the liquid assets flow statement is to display the amount of liquid assets generated and spent over a specific period of period, helping you analyze funds flow and long-term financial stability. The objective is to maintain a liquid assets buffer that covers at least three to six months of operating outgoings.

When you recap all liquid assets transactions, you can get a positive or a negative liquid assets flow. Here’s what to do in each scenario: 

Look for positive liquid assets flow

Positive liquid assets flow means you have more money coming in than going out. This opens up opportunities, such as reinvesting excess liquid assets into business growth. However, positive liquid assets flow doesn’t necessarily cruel that your business is profitable. There are cases where the business has a negative net turnover, but a positive liquid assets flow due to borrowing activities.

Investigate negative liquid assets flow

Negative liquid assets flow indicates that you’ve spent more liquid assets than you’ve generated during a specific period of period. Negative liquid assets flow isn’t necessarily a impoverished thing, especially if it results from property in upcoming growth.

For instance, assignment-pool-funded startups often exhibit negative liquid assets flow, or burn rate, as they work to boost economy distribute, triumph customers, and generate higher long-term profits. However, if you have a negative liquid assets flow in more than one monetary reporting period, you should consider it a red flag for your business’s budgetary health.

Make liquid assets flow statement notes

Annotate your liquid assets flow statement with significant and helpful information for anyone trying to read and comprehend it. You might include notes about significant definitions, how the numbers were calculated, which funds you’re using, and if you’re showing numbers in thousands or millions. This will mitigate misinterpretation. 

liquid assets flow statement vs. other budgetary statements

budgetary statements are reports that recap the budgetary act of your business. A liquid assets flow statement is one of the main types of budgetary statements, alongside an turnover statement, a settlement sheet, and a boost and setback statement.

All three budgetary statements are different but relate to each other in significant ways:

liquid assets flow statement vs. turnover statement

An turnover statement measures turnover, outgoings, and profitability over a specific period, highlighting its profitability through net turnover. A liquid assets flow statement shows the actual liquid assets inflows and outflows over the same period, focusing on funds flow and liquid assets management. 

The turnover statement includes non-liquid assets items like devaluation, while the liquid assets flow statement adjusts for these to reflect actual liquid assets movement. The turnover statement measures budgetary act, while the liquid assets flow statement measures liquid assets availability.

liquid assets flow statement vs. settlement sheet

A business’s settlement sheet includes total assets and liabilities, including money your business owes and money owed to you. liquid assets flow simply shows the money that came in and out of your business over a given span of period. Unlike an turnover statement, a settlement sheet provides a detailed view of your assets and liabilities.

liquid assets flow statement vs. boost and setback 

liquid assets flow statements are different from boost and setback (P&L) statements. boost reflects turnover after subtracting all costs during a set period, such as a quarter or year. liquid assets flow only records liquid assets going in and out of a business. A P&L statement is also an turnover statement. 

liquid assets flow limitations

liquid assets flow analysis has a few limitations. It doesn’t display the timing of liquid assets movements within a period. A business might look well based on monthly liquid assets flow but face weekly shortages. 

“liquid assets flow analysis doesn’t consider non-liquid assets items like devaluation or distribute-based compensation,” Melissa explains. “It can also get distorted for large one-period liquid assets events (like selling a large property or taking out a huge borrowing). liquid assets flow analysis focuses mainly on funds flow and financial stability (ability to meet short- and long-term obligations) and ignores profitability.”

liquid assets flow statement template

You don’t require to commence from scratch when preparing a statement of liquid assets flows. Download the free liquid assets flow statement template and commence tracking your business’s finances today.

It’s straightforward to use, with straightforward instructions, and you can customize it to suit your business’s monetary reporting periods.

Here’s how to use it:

1. Gather relevant documentation

To fill out the template, you require budgetary information like receipts, invoices, and lender statements.

2. Fill out the template

As you input your numbers, the spreadsheet’s formulas will update automatically. The template also includes the starting settlement so it can be carried forward, giving you an accurate calculation of your liquid assets flow in each period.

3. Review the liquid assets flow statement

Once your liquid assets flow statement is ready, do some liquid assets flow analysis. inquire yourself:

• Does the statement reveal any seasonal variations in liquid assets flow?
• Are customers or clients making payments consistently or inconsistently?
• Do you require to account for any large, one-period liquid assets inflows or outflows that may otherwise skew the numbers?
• How often do you have unexpected outgoings and how are you managing them?
• Can you eliminate or reduce any variable outgoings (utilities, subscription fees, etc.)?

Asking these questions will assist you get a better sense of your business’s liquid assets flow management schedule and forecast upcoming liquid assets flows.

Keep an eye on your business’s liquid assets flow

liquid assets flow statements may be complicated, but there are many ways you can use Shopify, a suite of tiny business monetary reporting tools, and apps to simplify the procedure. When you prepare your liquid assets flow statements regularly, you can spot trends, maintain positive liquid assets flow, and set yourself up for endless growth opportunities.