What is a Cash Flow Statement?

what is a cash flow statement

Keeping an eye on the money flowing in versus the cash flowing out, that’s the hub of small business financials. And the document that gets that done is called a cash flow statement.

This statement helps small businesses see where cash flows in from and how it gets spent. They’re an important way to manage finances.

What Exactly is a Cash Flow Statement?

These cash flow statements are a big part of financial accounting. They are also called statements of cash flows.

Wondering what is cash flow? These financial statements break down into financing, investing, and operating activities. They include a company’s net income, and there’s a method to calculate how much cash is available.

what is a cash flow statement

Wondering what is a P&L statement and how these fit in? These provide further insights into the cash flow. Read on to find out what goes into one, how to calculate cash flow and other important aspects.

Positive Cash Flow Vs. Negative Cash Flow

The best way to avoid a cash flow problem is to understand the differences between the types. And how each affects a company’s financial health.

  • A negative cash flow describes a situation where a small business spends more than it brings in.
  • A positive cash flow is the opposite. More money is coming in than going out.

Businesses that experience negative cash flow might be waiting on payments. Offering early payment discounts can foster a positive cash flow.

what is a cash flow statement

Purpose of a Cash Flow Statement for Small Businesses

A cash flow statement, integral to the financial fabric of small businesses, provides insights into the movement of cash and cash equivalents. This financial document works in conjunction with other important statements, such as the balance sheet and the income statement.

The former illuminates what a business owns and owes at any given point, while the latter accentuates the revenues and expenses over a specific period.

Together, these financial statements furnish stakeholders with a holistic understanding of a business’s fiscal health. Here’s a deeper exploration of the main purposes served by the cash flow statement:

Planning Repayment of Loans

  • Financial Commitments: A cash flow statement gives clarity on available funds, aiding in the formulation of repayment strategies without hampering operational needs.
  • Capital Expenditure Decisions: By evaluating the cash inflows and outflows, businesses can prudently plan for capital expenditures, ensuring the sustenance and growth of the business.

Gaining Insights Into Spending

  • Operational Transparency: While the profit and loss statement captures revenue and expenses, the cash flow statement provides a granular view of actual cash-based transactions, revealing the real-time cash status.
  • Fiscal Precision: This statement can spotlight areas of high spending, assisting businesses in refining their expense strategies.

To Get A Better Picture of Your Cash Balance

  • Real-time Snapshot: Calculating the cash flow delivers an accurate representation of liquidity, allowing businesses to discern if they maintain sufficient funds to meet their obligations.
  • Transparency: An understanding of gross cash receipts, inclusive of underlying costs and expenses, ensures there are no misconceptions about the available cash.

Managing A Crisis

  • Predictive Analysis: Regular reviews of the cash flow statement can anticipate potential liquidity problems, empowering businesses with the foresight to address them in advance.
  • Strategic Planning: If the statement indicates a potential shortfall, businesses can preemptively address the discrepancy, for example, by revisiting terms with suppliers or exploring financing options.

what is a cash flow statement

Main Components of a Cash Flow Statement

For small businesses and large corporations alike, a cash flow statement serves as an essential financial document, detailing the movement of cash and its equivalents in and out of the enterprise.

By dividing the cash flow into distinct sections, the statement provides a comprehensive view of the company’s financial health. Here’s an in-depth breakdown of the major components:

1. Operating Activities

The operating activities are often the primary focus of a cash flow statement as they reflect the cash transactions stemming from the core business operations.

This encompasses cash generated from sales, expenses related to business operations, and adjustments for non-cash items such as depreciation. Additionally, it considers changes in working capital accounts like accounts receivable and accounts payable.

Overall, this section provides insights into how the company generates cash through its main business activities.

2. Investing Activities

Detailing the company’s investment activities, this section includes transactions related to fixed assets such as land and buildings, vehicles, and other long-term investments.

By examining the investing activities, one can understand the cash flow associated with the company’s capital expenditures, such as the purchase or sale of equipment and property.

3. Financing Activities

Financing activities offer a view into the company’s financial decisions involving external entities. This section reports all the cash transactions with lenders and borrowers, such as issuing or repaying debt and equity.

It provides clarity on how the company funds its operations and returns value to its shareholders.

Discover More: Read about the different small business funding options.

4. Net Income Figure

Every cash flow statement starts with the net income, which reflects the net cash the company has earned. It serves as a benchmark, gauging the company’s ability to generate cash efficiently.

5. Operating Expenses

These are the routine expenses a company incurs during its normal business operations. Such expenses include cash paid out as wages or salaries to employees, legal fees, accounting services, office supplies, and utilities.

All these are crucial for the day-to-day functioning of the company and provide insights into its operational efficiency.

6. Non-Operating Expenses

Appearing towards the bottom of an income statement, non-operating expenses encompass costs that aren’t directly tied to the daily operations of the company.

Items such as interest paid on bank charges and the effects of amortization and depreciation fall under this category. They provide context on the company’s financial obligations and asset utilization outside its main business activities.

Cash Flow Statement Example

It’s easier to understand a cash flow statement with an example.

QuickBooks supplied this template. Note that some noncash revenue like appreciation needs to be included.

How to Prepare a Statement of Cash Flows

Trying to predict future cash flows hinges on a detailed statement. Here are some steps you can take to that end.

Remember to follow the generally accepted accounting principles (GAAP). Numbers need to be accurate and include operating income for income taxes.

  • Gather The Information and Data – put together contracts files and documents to arrive at a net cash flow.
  • Find A Starting Balance – should include the balance of cash equivalents and cash disbursements.
  • Calculate The First Cash Flow – this number comes from operating activities.
  • Do The Same For Investing Activities – the focus is on the buying and selling of equipment, facilities, and property.
  • Calculate Cash Flow For Financing Activities – notes payable are included. Like paying back debts to creditors and investors. Financing cash flow numbers should reflect each fiscal period.

what is a cash flow statement

Analyzing a Cash Flow Statement

A good financial statement analysis will cover sales transactions that are not cash too. It can help put the pieces together when you’re looking for more cash.

Comparison of Direct Method and Indirect Method for Cash Flow Calculation

To understand and evaluate a cash flow statement effectively, it’s essential to know the two primary methods used to calculate cash flows: the Direct Method and the Indirect Method. Each has its own advantages and approach. Here’s a quick comparison to help you distinguish between them:

CriteriaDirect MethodIndirect Method
Starting PointActual cash receipts and paymentsBegins with net income
Ease of CalculationStraightforward subtractionRequires adjustments for non-cash transactions
Detail LevelDetailed view of cash transactionsProvides a summary, focusing on adjustments
Common UsageLess common in practiceMore widely used due to available information from other reports
Main AdvantageClear view of cash sources and usesTakes into account non-cash transactions

Use the Direct Method

The direct method provides a straightforward way to gauge cash flow by looking at actual cash transactions. By subtracting cash outflows from inflows, you can ascertain the net cash movement. For instance, consider actual payments made to suppliers or wages paid to employees.

Use the Indirect Method

The indirect method is more intricate. It begins with the net income and subsequently adjusts for noncash transactions. Items such as depreciation, amortization, and losses or gains from the sale of fixed assets are taken into account.

It essentially provides a reconciliation between net income and net cash provided by operational activities.

Look To Operating Cash Flow/Net Sales

This specific ratio can offer valuable insights into the company’s efficiency. By examining how much cash is generated for every sale, you can determine the liquidity and short-term financial capability. Expressed in dollar terms, it indicates the cash conversion efficiency of your sales.

Calculate Free Cash Flow

Free cash flow is a critical metric that indicates the financial strength of a business. It showcases a company’s ability to produce cash after accounting for maintenance or expansion of its asset base.

You can determine free cash flow by taking the operating cash flows from the cash flow statement and subtracting capital expenditures.

Analyze Unlevered Free Cash Flow

Unlevered Free Cash Flow gives a purer view of a company’s cash-generating capability, as it looks at the cash flows before considering interest payments or other financial costs.

It provides a clearer picture of the available cash flow without the influence of the company’s debt structure. By analyzing this, you can discern the inherent cash-generating potential of the business operations.  Here’s the formula.

In conclusion, these various methods and metrics offer unique lenses through which you can view a company’s cash flow. By employing them, businesses can make well-informed decisions and strategize for sustainable growth.

The Significance of Operating Cash Flow to Net Sales Ratio

Understanding the operating cash flow to net sales ratio is crucial for small businesses as it provides insight into the efficiency with which a company can convert its sales into cash. This ratio is a key indicator of a company’s liquidity, operational efficiency, and overall financial health.

A higher ratio suggests that the company is more effective in managing its cash flow, implying that it is generating more cash from its sales activities. Conversely, a lower ratio might indicate potential issues in collections or sales effectiveness, signaling the need for strategic adjustments.

The Importance of Free Cash Flow Analysis

Free cash flow analysis is vital for small businesses as it measures the amount of cash a company generates after accounting for capital expenditures necessary to maintain or expand its asset base.

This metric is essential for investors, creditors, and company management to assess the health of the business and its ability to generate cash that can be used for expansion, debt repayment, dividends, or other purposes.

A positive free cash flow indicates that a company has sufficient financial flexibility to support its operations and invest in growth opportunities without relying on external financing.

Understanding Unlevered Free Cash Flow

Unlevered free cash flow is a critical financial metric that represents the cash a business generates before taking into account any financial obligations such as interest payments.

This figure offers a clean snapshot of a company’s operational effectiveness and cash-generating capability, free from the distortions caused by its capital structure.

For small businesses, analyzing unlevered free cash flow is essential for evaluating operational performance and making informed decisions regarding investments, expansions, or initiating new projects without the influence of debt.

Advantages and Disadvantages of Cash Flow Analysis


  • Insight into Liquidity: Cash flow analysis provides a clear picture of a company’s ability to cover its short-term obligations, highlighting its liquidity position.
  • Operational Efficiency: It helps assess how efficiently a company is managing its operating activities to generate cash.
  • Investment Potential: Analyzing cash flows can indicate a company’s potential to fund growth initiatives internally, without needing external financing.
  • Financial Flexibility: Positive cash flow enhances a company’s flexibility in making strategic decisions, such as pursuing new opportunities or weathering economic downturns.


  • Time-Consuming: For businesses not using automated systems, preparing and analyzing cash flow statements can be time-consuming.
  • Complexity: Understanding and interpreting cash flow can be complex, especially for those without a financial background.
  • Not a Profit Indicator: Cash flow analysis focuses on liquidity, not profitability. A company can have positive cash flow while being unprofitable.
  • Short-Term Focus: While crucial for immediate financial health, cash flow analysis may not always reflect long-term profitability or growth potential.

How Small Businesses Can Optimize Cash Flow

To ensure financial stability and foster growth, small businesses should adopt strategies to optimize their cash flow. Effective invoicing practices, such as prompt billing and offering incentives for early payment, can accelerate cash inflows.

Rigorous expense management, by regularly reviewing and cutting unnecessary costs, helps control cash outflows. Additionally, maintaining a cash reserve can provide a buffer against unforeseen financial challenges, ensuring the business remains operational during tough times.

Strategic planning, including forecasting future cash flows and establishing a solid relationship with financial institutions, can further enhance a company’s cash position.


A cash flow statement is an indispensable tool for small businesses, offering deep insights into the financial dynamics of operating, investing, and financing activities.

By meticulously analyzing cash flow, businesses can identify strengths and pinpoint areas needing improvement, paving the way for strategic decision-making and sustainable growth.

Understanding the nuances of cash flow analysis, including the advantages and challenges, enables entrepreneurs to navigate their financial landscape with confidence and precision.

As small businesses strive for efficiency and profitability, mastering cash flow management becomes a cornerstone of their financial strategy, ensuring long-term success in the competitive business world.

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Rob Starr Rob Starr is a staff writer for Small Business Trends and has been a member of the team for 7 years. He is a graduate of Ryerson University in Toronto with a Bachelor of Journalism degree. His print credentials include employment with various Toronto area newspapers and three works of fiction: The Apple Lady (2004), Creekwater (2006) and Sophistry By Degrees (2008) published by Stonegarden Press In California.