7 Reasons Why Your Cash Flow Statement Doesn’t Balance And How to Fix it

Introduction

A cash flow statement that does not balance is one of the most common and frustrating issues faced by finance professionals preparing financial statements. Despite its reputation as a complex statement, a cash flow statement is mechanical in nature. If prepared using a sound methodology, it should always balance.

This article sets out seven common reasons why cash flow statements fail to balance and explains a two-phase approach to compiling a cash flow statement. Whether right or wrong in presentation, there is no reason any cash flow statement should ever be out of balance.

Reason 1: Not Using the Balance Sheet as a Starting Point

Cash flow statements are derived primarily from movements in balance sheet accounts. Because the balance sheet always balances in its own right, the movement in cash must equal the movement in all other SFP accounts combined.

Many professionals attempt to compile cash flow statements top-down, starting with profit before tax and slotting figures into various lines all at once. While this may appear logical, it usually results in:

• excessive or confusing adjustments;
• no clear control point; and
• an imbalance at the end with no indication of where things went wrong.

The best approach is to start with a bare cash flow statement that reconciles every balance sheet movement to a cash flow line, and only then apply adjustments.

Reason 2: Incorrect Reconciliation of Balance Sheet Movements to Cash Flow Statement Captions

Once Phase 1 is complete (as outlined below), the cash flow statement should already balance. If it does not, the error lies in how balance sheet movements have been mapped.

Examples of where specific accounts might reconcile to include:

• PPE → Acquisition or disposal of property, plant and equipment;
• Trade receivables → Changes in working capital;
• Trade payables → Changes in working capital;
• Retained earnings → Profit before tax (before adjustments);
• Borrowings → Proceeds from or repayment of loans.

If the statement does not balance at this stage, stop immediately and resolve the issue before proceeding.

Reason 3: The Statement of Financial Position Does Not Balance

Always verify that the balance sheet balances before attempting to prepare the cash flow statement. Any imbalance will inevitably flow through to cash.

Reason 4: Only Checking the Balance at the End

Compiling a cash flow statement is not a trial-and-error exercise. Balancing should occur:

• after Phase 1;
• before and after every adjustment; and
• continuously throughout the process.

Phase 1 guarantees balance. Everything thereafter is merely reclassification. A methodical approach ensures that errors are identified immediately rather than at the end.

Reason 5: Unequal Adjustments

Every adjustment should theoretically increase the figure in one line, while reducing the value in another. No adjustment should ever change the net movement in cash.

Adjustments typically:

• reclassify between two balance sheet accounts (for example, recognising a lease by debiting a right-of-use asset and crediting a lease liability); or
• move an amount from an balance sheet-derived line to a direct cash flow line (for example, depreciation as a non-cash adjustment).

In our recent article, we highlight all the common cash flow statement adjustments.

Reason 6: Mixing Sources

Always use figures from the financial statements where available. This keeps the figures in the statement internally consistent with the rest of the financial statements. Trial balances and transaction listings should only be used where absolutely necessary.

Mixing sources increases the risk of:

• duplication;
• omissions; and
• inconsistencies between statements.

Reason 7: Preparing the Cash Flow Statement Too Early

The cash flow statement depends on figures from across the financial statements. If those figures are not finalised, reviewed, and corrected, the cash flow statement will inevitably be wrong and may have to be recompiled multiple times.

Prepare the cash flow statement last — not first.

The Two-Phase Approach to Compiling a Cash Flow Statement

At Leash, we view the compilation of a cash flow statement as a process with two distinct phases:

1. Balance sheet account reconciliation — ensuring the statement balances.
2. Adjustments — refining presentation without affecting net cash.

Understanding and strictly separating these phases is the single most important step in avoiding balancing issues.

There are several benefits to following this approach:

• Completeness: As all balance sheet accounts' movements are reconciled, the risk of unidentified cash movements is greatly reduced.
• Multiple control points: It's easy at any point to identify errors that have caused imbalances.
• More accurate adjustments: By separating balancing from adjustments, the accuracy of the cash flow statement can be refined almost to an infinite level of detail. Finance teams have more control over where the line is drawn.

Phase 1: Balance Sheet Account Reconciliation

Phase 1 is where balancing is ensured. Each movement (from opening balance to closing balance) in the statement of financial position (SFP or "balance sheet") is reconciled — naively — to a line in the cash flow statement.

At this stage, no attempt is made to be conceptually perfect. The objective is simply to create a baseline cash flow statement that balances.

Examples:

• If property, plant and equipment (PPE) increased by 2m, assume 2m was spent acquiring PPE.
• If trade payables decreased by 50k, assume 50k was paid to suppliers.
• If retained earnings increased, assume the movement relates to profit for the period.

Foreign exchange differences, depreciation, impairments, and other non-cash or complex items are ignored entirely at this point.

Remember that:

• an increase (debit) in a balance sheet account normally reflects cash spent (credit); and
• a decrease normally reflects cash received.

Accordingly, the sign of each cash flow line will be the opposite of the movement in the underlying SFP account.

Phase 2: Adjustments

Phase 2 is where more accuracy is introduced. Figures from Phase 1 are reclassified to present a more meaningful picture of cash flows. We do this by:

1. Inspecting the income statement and related notes for any non-cash transactions (e.g., depreciation, impairment losses, foreign exchange etc.)
2. Separating out specifically identified cash outflows from reconciling amounts. E.g., suppose PPE has a reconciled movement 1.5m (outflow), but we know we also received 200k for selling PPE, we show this amount separately, and our aquisition of PPE instead becomes 1.7m.

Each adjustment must:

• balance in its own right; and
• have no impact on the net change in cash.

For example, if 100k of depreciation is identified:

• operating cash flow is adjusted upwards by 100k (non-cash add-back); and
• 100k is deducted from the PPE acquisition line, increasing the outflow.

The total cash outflow remains unchanged — only the classification improves.

Conclusion

A cash flow statement that does not balance is never a mystery. It is always the result of flawed methodology or poor discipline.

By:

• starting with the statement of financial position;
• separating balancing from adjustments; and
• ensuring every adjustment is neutral to net cash,

you can guarantee that your cash flow statement will always balance. Accuracy in presentation comes later — balance is the foundation.

For clarification, guidance, or feedback on this article, please reach out to us at insight@leash.co.za.