Successful investors and business owners know the value of a cash flow statement.Tracking the amounts of cash flowing into and out of your account is essential for controlling your profits. Accountants always use the cash flow statement, sometimes referred to as a statement of cash flows, as a powerful tool in determining true wealth for individuals, businesses and investors. Knowing how to prepare a cash flow statement will allow you to create a snapshot of the success of your investments.
What a Cash Flow Statement Includes
1. Operating Activities
2. Investing Activities
3. Financing Activities
It is from analysis of these activities that you will know how and where your cash is used and how the increase or decrease in cash happened. Most investors will agree that having a sufficient amount of cash on hand will prepare you for emergencies and circumstances that arise that require cash investments.
How to Prepare a Cash Flow Statement
A statement of cash flows will be slightly different for each investor or corporate entity that invests in real estate. No two companies have the same expenses and outflows of cash. This example of a statement of cash flows is strictly for a basic real estate investor that invests in rental properties and will use the direct method of reporting for the statement of cash flows.
Statement of Cash Flows
(income in brackets means a decrease in cash)
Cash Flow from Operating Activities:
Cash received from rent: $12,000
Cash spent for repairs: ($500)
Cash spent for supplies: ($200)
Cash spent for property tax: ($1000)
Cash spent for property management: ($1000)
Net cash earned from operating activities: $9300
Cash Flow from Investing Activities:
Cash spent for new windows: ($1000)
Cash spent for new roof: ($2000)
Cash spent for insurance: ($300)
Total cash spent for investing activities: $3300
Cash Flow from Financing Activities:
Cash invested by 401(k) to buy property: $10,000
Cash paid for 401(k) 10 percent distribution penalty: ($1000)
Total cash earned by financing activities: $9000
Net Increase or Decrease in Cash: $15,000
The calculation used to produce the results was total cash earned or invested minus total cash spent. Knowing how cash was used to produce your cash profits will help you understand how your rental property earns income to build your wealth and provide the successful real estate portfolio that you deserve.