Cash Flow and Balance Sheet Link

The cash flow and balance sheet can be linked by looking at balance sheet movements. An understanding of this connection allows a business to control it’s cash flow by controlling the balance sheets.


Cash Flow

Typically a simple cash flow statement for a business is along the following lines.

Cash Flow and Balance Sheet: Typical Cash Flow Statement Outline
Beginning cash balance 30
Cash receipts 350
Cash payments -305
Cash Flow 45
Ending cash balance 75

What this cash flow statement tells us is that the ending cash balance is equal to the beginning cash balance plus cash receipts less cash payments. If we rearrange this we have:

Receipts – Payments = Cash flow = Ending cash balance – Beginning cash balance

So the cash flow is simply the difference between the beginning and ending cash balances.

The table below shows the beginning and ending balance sheets of a typical business, and in the final column shows the movement between the two balance sheets. The presentation has been simplified for the purpose of this explanation.

Beginning and Ending Balance Sheets

Cash Flow and Balance Sheet: Beginning and Ending Balance Sheets
Balance sheet Begin End Change
Fixed Assets 200 550 350
Cash 30 75 45
Accounts receivable 50 90 40
Inventory 45 80 35
Accounts payable -60 -85 -25
Loans -120 -450 -330
Net assets 145 260 115
Capital 100 150 50
Retained earnings 45 110 65
Equity 145 260 115

The blue highlighted row shows the beginning and ending cash balances and the cash movement. We can see that the cash movement between the balance sheets is the ending cash balance (75) less the beginning cash balance (30) which, comparing this to the cash flow statement above, is the same as the cash flow (45), so the link between the cash flow and balance sheet is:

Cash flow = Balance sheet cash balance movement

Careful monitoring of balance sheets and balance sheet movements will therefore allow a business to control cash flow.

Cash Flow and Balance Sheet and the Accounting Equation

The accounting equation tells use that the assets of the business must always be equal to the liabilities plus the equity of the business.

Assets = Liabilities + Equity

Since cash is one of the assets included in the accounting equation we can rearrange the equation as follows:

Assets = Liabilities + Equity
Cash + Other assets = Liabilities + Equity
Cash = Liabilities + Equity - Other assets  

Since we know from above that the cash flow is the same as the change in the cash balances on the balance sheets.

Cash = Liabilities + Equity - Other assets
Change in Cash = Change in Liabilities + Change in Equity - Change in Other assets  

cash flow and the balance sheet

So the cash flow of the business can be determined by looking at the changes in the balance sheet liabilities, equity, and other non cash assets, which is the basis for the indirect cash flow statement.

Last modified December 4th, 2019 by Michael Brown

About the Author

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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