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It's no surprise that cash-flow management could be a challenge for businesses of all sizes. It makes sense, given that cash flow, which is the money flowing in and out of a business, is a crucial factor in any company's success. How can you get a handle on it? Cash-flow statements are a great place to start. These reports are used to help business owners manage their cash flow and plan for the future.
Cash-flow statements help business leaders see how money flows through their business, which may help identify opportunities for trends and insights to emerge. This practical, comprehensive guide is designed to help you understand cash-flow statements and how the information they provide may help factor into real-world financial decision-making.
What Is a Cash-Flow Statement?
A cash-flow statement is a financial statement that documents the money flowing into and out of a company over a specific period. It includes not only the amount of cash, but where it comes from and where it goes. A statement of cash flow could indicate that a business has positive cash flow if it is taking in more cash than it spends. On the other hand, if more goes out than in, the business may have negative cash flow, and the owner may consider ways to help improve their cash-flow management.
Examining cash-flow statements regularly may help business owners identify long-term trends that could reveal opportunities or where financial or operational changes may be beneficial. This could make cash-flow statements an important tool for evaluating financial health beyond surface-level metrics.
What Is Cash Flow Vs. Profit?
The cash-flow statement could be a powerful tool for monitoring a business's financial health. One of the first steps to wielding it wisely is to learn the difference between cash flow and profit. A profitable business, as reflected in its income statement, may face cash-flow challenges that could threaten its financial health. For example, unpaid invoices, inventory overstock, or capital investments could create liquidity challenges, even as healthy sales continue.
This is because many businesses use the accrual basis of accounting, which is required by U.S. Generally Accepted Accounting Principles (GAAP). Under this model, revenue is recognized when it is earned, not when accounts payable receives the money. Expenses are also recognized when incurred, not when the business pays the bill. This means that a business's net income — its profit — or net loss for a period equals revenue earned minus expenses incurred.
The timing difference between when revenue is recognized and when it's collected could be a cash-flow danger zone for businesses. After all, a company can’t pay employees with revenue that's earned but not yet collected. In this cash-flow statement example scenario, a small-business owner may be able to foresee the cash crunch and take action to avoid it.
Interpreting Sources and Uses of Cash
A cash-flow statement shows the sources of cash entering the business and the uses of cash leaving during a stated period. Business owners may review monthly, quarterly, or annual cash-flow statements.
Identifying the cash sources can be a key element of these statements. When a business leader sees how the company generates cash, they may better understand and potentially predict cash inflow. They may gain visibility, for example, into whether their company is generating cash from its core operations — such as sales of products and services — vs. from selling equipment or taking out a loan.
Cash-flow statements may help leaders to identify insights into cash disbursements, like whether the company’s cash balance is increasing because it’s not paying bills, potentially causing an increase in liabilities.
The GAAP format requires public company cash-flow statements to include three sections:
- Operations: All money going into and out of a business's core operations. Revenue is a type of inflow, and payroll is a common outflow.
- Investing Activities: Funds related to long-term investments. This could include both heavy equipment purchases and sales.
- Financing Activities: Money coming in from and paid out to financial partners, such as a bank or an owner's investment.
GAAP standardization could allow more useful comparisons between companies and may help make the statement easier for external stakeholders to use.
How to Read a Cash-Flow Statement
Once a business owner feels secure about what a cash-flow statement is all about, they can get into the details of how to read one. Five critical items on a cash-flow statement include: the three net cash-flow figures from operations, investing, and financing, the ending cash balance, and the total net cash flow for the reporting period. Among the important data points on that page are the beginning and ending cash balances for the reporting period.
When the cash balance rises, the company is “cash positive” — which may be considered a good thing. When the ending cash balance begins to fall, the company is “cash negative.” Unless it comes as a surprise, being cash negative may not always be a bad thing. It could reflect the company's smart investments. Generally speaking, though, businesses may want to avoid long cash-negative periods.
Cash-flow statements could also include year-over-year comparisons. For example, a cash-flow statement might list activity for the nine-month period ended September 30, 2025, side-by-side with the nine-month period ended September 30, 2024. The comparison could add another dimension of insight.
Cash-flow statements may be prepared for different business units or company-wide. A department manager may look at their area’s cash-flow statement to help understand how the department may be affecting the company’s overall financial health. An external investor might rely on company-wide cash-flow statements to evaluate whether a company may be positioned for growth.
Understanding the Components of a Cash-Flow Statement
Bookkeeping software may generate all of these statements automatically. However, if you're creating a cash-flow statement on your own, an example of a cash-flow sheet might include:
Operations Cash Flow
Operations cash flow may encompass much of the business's day-to-day activities. The line items may differ by company, but they could include net earnings, cash changes in accounts receivable or payable, inventory changes, etc. Cash-flow trends in this category could indicate to a business leader whether their core business model is working well, or if product, service, or staffing changes might be beneficial.
Investment Cash Flow
Investment cash flow might look like the purchase of a major piece of equipment, the sale of a business vehicle, or even some major software licenses. A small-business owner may use this section to help consider whether their investments in the future aren't harming their current financial health.
Financing Cash Flow
Financing could be critical to cash flow, as loans and lines of credit may be strategies for managing cash-negative periods. This section may include financial inflows like owner capital contributions, loan proceeds, or investor funding. It also may also show outflows like loan payments.
Cash Flow From Operations
Cash flow from operations may include sources (such as money collected from customer payments) and uses (including disbursements for raw material inventory, payroll, utility payments, and all other transactions) from the normal course of business.
The Cash Flow From Operations section of the statement may start with the company’s net income from the income statement for the same period. Each entry may modify that net income by stripping out non-cash activity or adjusting for changes in working capital.
For a cash-flow statement example: Depreciation reduces net income, but does not involve spending cash, so depreciation is added back to net income when calculating cash flow from operations.
On the flip side, an increase in accounts receivable, which is from sales made to customers on credit, is part of net income, but it does not technically increase a company’s cash flow. Therefore, that would be subtracted from net income when calculating cash flow from operations.
After all the adjustments are made, the Cash Flow From Operations section may show the cash version of a company’s net income as a positive or negative figure.
Cash Flow From Investing Activities
The second section on a cash-flow statement could show activity from changes in capital assets and long-term investments.
These changes may involve large amounts that occur relatively infrequently and are outside the organization’s day-to-day operating activity. Examples could include buying or selling equipment, machinery, land, buildings, vehicles, or warehouses. Cash proceeds from a capital asset sale may be a source of cash, while spending cash on capital assets may be a use of liquidity.
Investment activity, such as buying and selling marketable securities, may also be captured here. Any interest income from these securities may be included in the Cash Flow From Operations section. Cash acquisitions and divestitures of business units may also be included in this section.
When evaluating the quality of cash flow, investing activities may be considered secondary to operating activities because they’re not part of the company’s core operations.
Cash Flow From Financing Activities
The Cash Flow From Financing Activities section may outline how a company is funded using debt and equity and may be related to changes in long-term liabilities and equity accounts on the company’s balance sheet.
Raising capital may appear as a source of cash. Examples could include proceeds of loans, capital contributions from owners or investors, and proceeds from selling shares of stock. Paying stakeholders may also be a use of cash. Examples could include repaying loan principals, paying cash dividends, or repurchasing company stock.
Examining this section of a statement of cash flow could provide insight into a company’s overall financial health. Large financing cash inflows may be viewed positively and could signal future growth, but could also mean that a company is using debt to stay afloat. Large cash outflows may mean that debt is being repaid or that profits are being shared through dividends.
How to Prepare a Cash-Flow Statement
If all of a business's financial transactions are regularly recorded in accounting software, leaders may be able to run a cash-flow statement with a few clicks. But in reality, sometimes a business owner may have a need to build their own cash-flow statement from scratch. Here's how owners may consider approaching the process:
1. Find The Starting Balance
Consider using financial documents, including income statements, the balance sheet, bank statements and more to help determine how much cash the business had at the beginning of the reporting period.
2. Calculate Operational Cash Flow: Indirect vs. Direct Method
Companies may calculate their operational cash flow using the indirect or direct calculation methods. In the direct method, cash flow is found by subtracting all cash disbursements from all the cash collections during the reporting period.
The indirect method could involve more steps, starting with identifying the net income from the business's income statement. Then, you adjust the number to remove non-cash items and working capital changes to determine the operational cash flow.
Both direct and indirect methods are GAAP-compliant, and the method that may be most efficient could vary from business to business. For some companies, the straightforward nature of the direct method is appealing, but for others, the indirect method may be less labor intensive.
3. Determine Investing and Financing Cash Flow
The second two statement of cash flow sections may be simpler steps, especially for small businesses. Consider using the descriptions above to help find all cash inflow and outflow activities for the investment and financing categories and calculate the positive or negative cash flow for each.
4. Find the End Cash Balance
This is the last bit of math for a cash-flow statement. Combine the positive or negative net cash-flow totals for operations, investing, and financing to determine the total cash balance for the reporting period. This figure may indicate how much cash the business gained or lost during the reporting period.
Statement of Cash-Flow Example
What does a cash-flow sheet example look like? Here is one scenario:
|
Statement of Cash Flow February 1, 2026 - February 28, 2026 |
|
|---|---|---|
Operating Activities |
|
|
Net Income |
|
$10,000 |
Adjustments to reconcile net income to cash generated |
|
|
|
|
$500 |
|
|
$500 |
|
|
|
Changes in operating assets and liabilities |
|
|
|
|
($2,000) |
|
|
$1,500 |
|
|
($10,000) |
|
Net cash for operating activities |
$500 |
Investing Activities |
|
|
Proceeds from securities |
|
$300 |
Equipment purchase |
|
($4,000) |
|
Net cash for investing activities |
($3,700) |
Financing Activities |
|
|
Bank loan payment |
|
($1,500) |
|
Net cash for financing activities |
($1,500) |
Net cash increase for period |
|
($4,700) |
Cash at beginning of period |
|
$2,000 |
Cash at end of period |
|
($2,700) |
|
|
|
The scenario above might reflect a strong February or a poor February, depending on the company's history and future. Here are some potential insights a business leader might draw from the statement of cash-flow example above:
- Cash flow is negative: Though the business brought in $10,000 of income, the cash going out overwhelmed that revenue.
- A substantial amount of cash is tied up in equipment and inventory: That might be expected for a seasonal business gearing up for a busy summer. Other business leaders might consider a change, perhaps selling down their inventory or rethinking that equipment purchase.
- Would additional financing be helpful? If the cash negative status reflected on the statement could disrupt time-sensitive upcoming expenses, like payroll, a business owner might consider whether to tap a business line of credit or a new loan.
Managing the Ending Cash Balance
The final number at the bottom of a cash-flow statement reflects the ending cash balance as of the last day in the covered period.
This balance, which should match the company’s balance sheet as of the same date, is the result of all the sources and uses listed in the three sections. There is no right or wrong when it comes to this cash balance; bigger isn’t always better. Excess cash might be a sign of underinvestment in the future or missed opportunities.
What Cash-Flow Statements May Say About a Business
The cash-flow statement is a historical document that may be used as a template for modeling future cash flows. Cash-flow forecasting may help business leaders estimate what their cash balance might be in the future, which could make the difference between a company’s survival and failure. One insight business leaders may identify through their cash-flow statements is the need to cut costs. Learn more about How to Manage Your Business’s Recurring Expenses.
Photo: Getty Images
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