The Importance of Cash Flow Statements for Home Service Businesses

As a home service business owner, you’re likely looking at your revenues and profits each month to see how everything’s going. Monitoring your cash flow and the amount of money entering and exiting your business is just as important.

Any size business can be profitable on paper but still fail due to cash flow problems.

Maintaining a healthy cash flow helps you pay your bills on time, keeps you stable even in slow seasons, and provides peace of mind to you as a business owner.

One of the best ways to monitor your money is through a cash flow statement. Whether you’re running a cleaning, painting, fencing, or landscaping company, this article can help ensure the survival of your business and how to manage cash flow.

What is a Cash Flow Statement?

A cash flow statement is a financial report that shows the movement of money in and out of your business for a given period. It tells you where your cash is coming from, how it’s being spent, and paints an overall picture of the company’s financial health.

This statement also measures how well you manage your cash and helps you plan ahead. It determines how much you have on hand and whether you have enough to cover your debts, pay the bills, and invest in growing your business—today and in the future.

Along with the balance sheet and income statement, the cash flow statement is one of the most important tools for managing your home service business’s money and ensuring you have enough to keep operating.

What are the Parts of a Cash Flow Statement?

A cash flow statement has three parts: cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities.

Cash Flow from Operating Activities

The first part of the statement includes cash that you’ve earned or spent as a result of your “regular business activity.” This refers to the transactions you enter into during your day-to-day operations, as you make money from products or services.

Cash flows from operating activities can include:

• Cash receipts from customers for providing cleaning services
• Cash payments for the purchase of cleaning solutions and supplies
• Salary and wage payments to your employees
• Payments for the rental of special cleaning equipment
• Income tax payments
• Payment for utilities and other operating expenses

Cash Flow from Investing Activities

As the name implies, cash flow from investing activities includes cash that you’ve earned or spent on investments for your business. 

When you buy an asset, such as equipment or commercial property, that will be used in the long run to improve your business’s profitability and efficiency, this transaction typically falls in this part of the cash flow statement.

Here are a few examples of cash flows from investing activities:

• Cash payment for a new lawn mower for your landscaping business
• Cash payment for a storage space for your fencing materials and construction tools
• Cash payment as an installment for a company building

Cash Flow from Financing Activities

This part of the cash flow statement includes cash that you’ve earned or spent to finance your business, such as taking out a bank loan or paying dividends to shareholders. Transactions involving debt, dividends, and shareholder’s equity usually belong here.

Cash flows from financing activities may include:

• Raising capital for your business by bringing in a new investor
• Paying cash dividends to company shareholders
• Paying off a bank loan
• Raising capital by issuing bonds to the public
• Receiving cash from a line of credit

How is Cash Flow Calculated?

There are two ways to calculate your home service business’s cash flow: the direct method and the indirect method. Both methods are allowed under the United States generally accepted accounting principles (US GAAP), so you can use whichever fits your business best.

Direct Method

Under the direct method, you’ll keep a record of all your cash receipts and payments for a given month or quarter, and use that information to prepare a cash flow statement for your business. This method may be easier if you have a small business that uses cash basis accounting.

Here’s an example of a cash flow statement that uses the direct method:

Home Service Business

Cash Flow Statement

For the Quarter Ended December 31

Cash Flow From Operating Activities

• Cash received from customers: $30,000
• Cash paid for supplies and materials: –$10,000
• Cash paid to employees: –$5,000
• Cash paid for utilities: –$1,000
• Cash paid for income tax: –$2,000

Net cash provided by operating activities: $12,000

Cash Flow From Investing Activities

• Cash paid for new equipment: –$3,000

Net cash used in investing activities: –$3,000

Cash Flow From Financing Activities

• Proceeds from long-term debt: $10,000
• Loan payments: –$4,000

Net cash provided by financing activities: $6,000

Net Increase in Cash: $15,000

Beginning Cash Balance: $12,000

Ending Cash Balance: $27,000

Indirect Method

A cash flow statement that uses the indirect method starts with your business’s net income and then adjusts it by adding or subtracting transactions that don’t show the movement of your cash.

These non-cash transactions show up as changes in your assets and liabilities over the period.

For example, depreciation is recorded as an expense on your income statement, and deducted from your revenues to calculate net income. However, since no cash actually left your business due to depreciation, you’ll need to add back that amount to arrive at your net cash flow.

Similarly, an increase in accounts receivable often involves sales or revenues that you’ve earned, which are added to get net income. However, you haven’t received cash from them yet, so we’ll adjust the net income by deducting that amount to arrive at your net cash flow.

As for accounts payable, an increase usually means you’ve recorded an expense on your income statement. Since it represents money that you owe, but haven’t paid in cash yet, you’ll need to adjust the net income by adding back that amount to get your net cash flow.

Here’s an example of a cash flow statement that uses the indirect method:

Home Service Business

Cash Flow Statement

For the Quarter Ended December 31

Cash Flow From Operating Activities

• Net Income: $60,000

Adjustments:

• Depreciation: $10,000
• Decrease in accounts receivable: $2,000
• Increase in inventories: –$5,000
• Increase in accounts payable: $4,000

Net cash provided by operating activities: $71,000

Cash Flow From Investing Activities

• Cash paid for new equipment: –$5,000

Net cash used in investing activities: –$5,000

Cash Flow From Financing Activities

• Proceeds from long-term debt: $25,000
• Loan payments: –$11,000

Net cash provided by financing activities: $14,000

Net Increase in Cash: $80,000

Beginning Cash Balance: $20,000

Ending Cash Balance: $100,000

How to Create a Cash Flow Statement

Follow these steps to create a cash flow statement for your home service business:

1. Prepare Your Financial Records

Before you begin, gather all the necessary financial records of your business. You’ll need them to provide information for your cash flow statement. These can include your accounting books or software, spreadsheets, and financial statements, like the income statement and balance sheet.

2. Choose a Time Frame and Method

You can prepare your cash flow statements on a monthly, quarterly, or annual basis—whichever benefits you and your business the most. Decide whether you’ll use the direct method or indirect method in preparing your statement.

3. Calculate Your Cash Flows

Create three separate sections in your statement for operating, investing, and financing activities. List down the cash receipts and cash payments or net income adjustments for each section and calculate your net cash inflow or outflow.

Remember, the direct method will involve subtracting your total cash payments from total cash receipts during your chosen time frame. Meanwhile, the indirect method starts with your net income, which you’ll adjust for changes involving non-cash transactions.

4. Combine All Sections

Once you’ve computed the net cash flows from your business’s operating, investing, and financing activities, add all three to determine your overall change in cash for the period.

Add the change in cash, which is either an increase or decrease, to your beginning cash balance. You’ll arrive at your ending cash balance, which should match the cash amount on your balance sheet.

Benefits of Cash Flow Statements for Home Service Businesses

Here are a few key reasons why a cash flow statement may be useful for your business:

• Cash Flow Forecasting: Cash flow statements allow business owners to observe their cash history and spending patterns. This will help you predict future cash flow and plan ahead to avoid having a cash shortage in slow seasons and tough times.
• Expansion or Investment Opportunities: You can use your cash flow statements to make better and more well-informed decisions about investments. You’ll know exactly how much cash flow you have, what you can afford, and what you can’t.
• Qualify for Business Loans: If you plan on securing a line of credit or a loan for your business, you’ll likely need to show potential lenders up-to-date cash flow statements. Investors may also want to see them if you plan on raising extra capital.
• Measure Financial Health: You can use your cash flow statements to efficiently track, measure, and analyze available cash and decide whether your money is enough to cover upcoming bills and expenses. 
• Identify Areas for Improvement: Cash flow statements allow you to spot potential money problems early before they get out of hand. They’ll help you identify declining revenues, expensive investments, and areas to cut costs and control spending.

Potential Cash Flow Issues to Consider

Understanding these common cash flow challenges can help you prevent cash shortages and avoid putting your home service business at risk:

• Seasonal Cash Fluctuations: You may notice that demand for your home services is higher in some seasons than others. If you don’t build up your cash reserves during peak periods, you may experience cash crunches during the leaner months.
• Late Payments from Customers: If many of your customers don’t pay on time, this can affect your ability to pay your bills and stall your business’s growth. Clear payment terms, regular reminders, and early payment discounts can help prevent this issue.
• Overspending on Investments: Aggressively spending your money on investments, like new equipment or more staff, all at once can hurt your cash flow. Staggering your purchases according to a budget can help your business grow at a healthier pace.
• Unexpected Expenses: Unforeseen costs, like equipment repairs or legal fees, can result in a cash shortage for your business. An emergency fund can provide your company with a financial cushion, giving it time to recover costs and get back on its feet.

Tips on Managing and Calculating Your Cash Flow

Aside from tracking your cash receipts and payments with a cash flow statement, these extra tips will help you manage and calculate your business’s performance:

• Collect Receivables Promptly: To bring in the funds faster, invoice your customers the same day your service is completed and offer multiple ways to pay. Use electronic invoicing to make your payment process as simple and convenient as possible.
• Organize Your Payroll: Keep your contractors and employees happy by managing your payroll well. Take note of important payroll dates to ensure you have enough cash on hand. Automating your payroll can help you save time and make accurate calculations.
• Pay Your Bills at the Right Time: Prioritize your bills according to their due dates to avoid straining your cash flow, and take advantage of discounts. Negotiate with suppliers for longer and more favorable payment terms that will maximize your cash flow cycle.
• Prepare for Taxes: Regularly review how much taxes you owe, and when they’re due. Setting cash aside each month will help your business prepare for tax payments and avoid any late fines or penalties from the IRS.

TL;DR

No matter the size of your business, managing your cash flow is essential to its survival, success, and stability in any industry. A cash flow statement is a powerful tool to keep your business financially healthy and help you make well-informed decisions behind the scenes.

More than just keeping track of money going in and out of your business, a cash flow statement helps you understand the past, control the present, and predict future cash flows. It can mean the difference between a business that’s barely making ends meet and one that’s thriving!

If you have any questions about cash flow statements for home service businesses or want to take your company’s bookkeeping to the next level, reach out to Dialed In Bookkeeping today. We handle the finances, you handle the business!

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