Cash Flow Statement: What Is It And Examples

A cash flow statement is a financial document used to track the movement of cash in and out of your business over a set period. It can give you valuable insights into how much cash flows through your company by highlighting how well you manage it.

For small business owners, it’s essential to understand how cash flow works to stabilise their operations, plan for future investments and avoid any financial shortfalls. So, let’s break down exactly what a cash flow statement shows and the key elements involved.

What is a cash flow statement?

A cash flow statement tracks a company’s cash inflows and cash outflows during an income year. It records the actual movement of money, not just accounting entries.

The cash flow statement is one of the three core financial statements, alongside:

• The balance sheet
• The income statement (profit and loss statement)

Together, these three documents give a complete picture of a company’s financial health and ability to generate cash.

While the profit and loss statement records revenue and expenses, the cash flow statement is all about the actual movement of money. When analysed correctly, it can help you see how well your business manages its cash to cover day-to-day expenses, repay debts and fund future growth.

Main parts of cash flow statements

To help illustrate exactly what a cash flow statement looks like, think about it in terms of three main sections:

1. Operating activities
2. Investing activities
3. Financing activities

Each section highlights different areas where cash is generated or spent, and together, they provide a holistic view of your business’s financial situation via the statement of cash flows.

1. Operating cash flow

The operating activities section records cash generated or used in your business’s core operations.

It typically includes:

• Cash receipts from customers
• Cash paid to suppliers
• Employee wages
• Interest payments
• Income tax payments

This section often starts with net income from the income statement and adjusts for:

• Non-cash expenses (such as depreciation)
• Changes in working capital
• Accounts receivable and payable
• Other non-cash items

Positive cash flow from operating activities shows the business is generating enough cash to cover operating expenses. Negative cash flow may indicate liquidity issues or slow customer payments.

Here’s an example: A small café receives $10,000 in cash receipts from customers in a month. After paying suppliers, staff wages, and interest paid, the net cash flow from operating activities is $6,500.

2. Investing activities

Next, the investing activities section breaks down the cash flow around purchasing or selling long-term assets. These could be anything from property to equipment to securities. In essence, these help grow your business, but in most cases, they demand a huge amount of capital upfront.

Cash spent on investments is a cash outflow, while cash received from the sale of an asset is a cash inflow.

Some common investing cash activites include:

• Buying new equipment
• Selling old equipment
• Capital expenditures
• Business acquisitions
• Investing in securities

Here’s another example: If a company spends $5,000 on machinery, it records an outgoing cash transaction in investing activities. If it sells equipment for $1,000, that amount is recorded as incoming cash. (Pro-tip: this could be an instant asset write-off for tax purposes).

3. Financing activities

Finally, there is the financing activities section. This part tracks the cash inflows and outflows associated with your business finance, including raising capital, paying dividends, repaying loans, and more. It shows how your company funds its everyday operations, whether that’s via external borrowing or internal reserves.

Financing activities can include:

• Issuing or repaying debt
• Equity financing
• Dividend payments
• Loan repayments
• Raising capital from investors

These activities show how the company funds its operations and growth.

One last example: A small business takes out a $20,000 loan to fund an exciting expansion. This is recorded as a financing cash inflow. If it repays $2,000, that amount is shown as an outgoing payment.

Why cash flow statements are so important for small business performance

As a small business owner, you need a healthy cash flow to stay operational and meet your ongoing financial obligations.

While a profit and loss statement can show whether your company is profitable, it doesn’t give you a clear picture of liquidity – this is where the cash flow income statement comes in. It can show that your business is not only profitable on paper, but has enough cash on hand to meet day-to-day needs.

Understanding your cash flow can help ensure your business has enough liquid assets to cover immediate expenses, such as rent, gas and electricity bills, or payroll.

If you don’t closely monitor your cash flow, it’s very easy to run into financial problems – especially if you don’t have enough cash to cover essential payments, even if you are technically profitable.

Cash flow statement example

Let’s look at a simple example of a cash flow statement for a small retail business over a month:

How to prepare a cash flow statement

1. Collect all financial data: Gather your business’s profit and loss statement, balance sheet, and other financial documents showing cash inflows and outflows.
2. Organise cash flow activities: Separate your cash flow into three sections: operating, investing, and financing activities. Each section should include only relevant cash transactions.
3. Adjust for non-cash items: Non-cash items or cash equivalents like depreciation and amortisation should be added back into the cash flow from operating activities, as they don’t affect the actual movement of cash.
4. Calculate net cash flow: Subtract the cash outflows from the inflows for each section to determine the net cash flow.
5. Total cash flow: Add the net cash flow from operating, investing, and financing activities to find the overall cash flow for the period. Add this to your opening cash balance to calculate the closing cash balance.

Direct method vs indirect method of cash flow

• Direct method: List all the individual cash inflows and outflows from your operating activities, including customer receipts and supplier payments. This method is more detailed but also more complex to prepare.
• Indirect method: Start with the net profit from your profit and loss statement and adjust for non-cash items, such as depreciation and changes to your working capital. This method is easier to prepare, which is why it’s more commonly used by time-poor small business owners.

Cash flow vs profit

Many small business owners confuse cash flow with profit, which can cause headaches later on. Profit is the amount of money left over after all expenses have been deducted from revenue, while cash flow is the actual movement of cash in and out of your business.

In context, your company can be profitable but still struggle with cash flow if its income is tied up in receivables or if you have big upfront expenses. Conversely, a business with strong cash flow might not be profitable with large ongoing costs. That’s why staying on top of both your cash flow and profit is so important.

Preparing a cash flow statement isn’t as complex as you might imagine. When you get into the habit of doing it every month, you can make smarter financial decisions about the future of your business.