What is a cash flow statement?

Cash flow is a term that gets thrown around a lot, but do you know exactly what it means? Cash flow measures the money coming into and going out of your business, and it gives a good snapshot of your organization’s financial health. It’s different from profit, which is the revenue that remains once all expenses are deducted. Profit is usually measured on an accrual basis, so it counts sales you haven’t been paid for yet and costs you haven’t paid yet, plus non-cash items such as depreciation. That’s why a profitable business can still run short of cash in the bank.

A cash flow statement (CFS) is a record of the cash that moved in and out of your business over a period, such as a month, quarter, or fiscal year. It covers cash and cash equivalents (such as money in very short-term deposits) and is useful to everyone from owners and managers to lenders and investors. Read on to learn more about why a CFS is an essential part of bookkeeping for professional services.

What is a cash flow statement?

Your cash flow statement is different from other regular reports like the balance sheet or income statement (profit and loss). The balance sheet is a snapshot at one date, and the income statement shows profit on an accrual basis. As the SEC’s beginners’ guide to financial statements¹ puts it, an income statement can tell you whether a company made a profit, while a cash flow statement can tell you whether it generated cash. A CFS:

• Covers a set period of time
• Tracks cash movements
• Measures increases and decreases in cash
• Reconciles your opening cash balance to your closing cash balance

Under US GAAP, the cash flow statement is governed by FASB Topic 230, Statement of Cash Flows, which classifies cash flows into three areas: operating, investing, and financing activities².

The operating section records the cash from running the business: receipts from customers, and payments to vendors and employees, including wages, rent, and tax. The investing section records cash spent buying long-term assets (equipment, vehicles, property) and cash received from selling them. The financing section records cash from owners and lenders, such as a new loan or capital put in by shareholders, and cash paid back to them, such as loan repayments, owner draws, and dividends.

How do businesses use cash flow statements?

Cash flow statements are a vital part of financial analysis. Your organization can use your CFS in a few key ways. You may find these reports useful for:

• Checking your liquidity. A cash flow report, read with your balance sheet, shows whether cash is building up or running down, and whether you have enough on hand to cover your bills. If you complete a monthly cash flow statement, you can spot trends and notice negative cash flow sooner rather than later. If you’re unclear about your current ability to cover liabilities, an accurate CFS is a good place to start.
• Reviewing historical data. Cash flow statements can also be used to see where your money went. Not sure where the cash is going? An itemized CFS shows you. You can also review cash flow over a period of time, which may help you pinpoint where you started to spend a lot more money.
• Projecting for the future. Your cash flow summary also helps you plan for the future. How much more cash do you need to bring in each month? Do you need to cut back on overhead costs to afford new equipment? A cash flow statement is the starting point for a cash flow forecast. If your operating cash flow has been negative over a long period, lenders and buyers will want to know why.

Based on what your cash flow statement reveals, you may need to change the way you handle your invoicing process and other activities associated with collecting cash. Unpaid invoices are detrimental to cash flow.

Structure of a cash flow statement

An internal cash flow statement can be laid out to suit your needs (statements prepared under US GAAP follow Topic 230), but there are a few pointers to keep in mind. In order for your statement to be as beneficial as possible, you want to make sure the form includes several essential components.

1. Divide the CFS by cash coming in and cash going out. Within each section, incoming cash is usually listed first, with cash going out beneath it. Subtracting outgoing cash from incoming cash gives the net change in cash for the period. Add that to your opening cash balance and you have your closing cash balance, which should match the bank.
2. Itemize incoming cash and expenses. Beneath both cash received (also called inflows) and expenditure sections, divide the cash activities more specifically. This helps you identify exactly where money is coming and going. For instance, under cash inflows, you may have lines for cash sales, collections from accounts receivable, and new capital or loans.
3. Code activities as operating, investing, or financing. Give each its own section with its own subtotal, so you can see whether the business generates cash from its operations or relies on borrowing and asset sales.
4. Denote positive versus negative cash flow. Traditionally, positive balances in cash flow are written in regular numerals, and negative balances are written in parentheses. For instance, if you gain $5,000 in sales and pay out $1,000 in repairs, you would write 5,000 under inflows and (1,000) under expenditures.

How is cash flow calculated?

There are two methods for presenting operating cash flow: the direct method and the indirect method. Topic 230 allows either². Both arrive at the same net operating cash flow, and investing and financing cash flows are shown the same way under both. A 2024 FASB staff presentation notes that most entities use the indirect method. If you use the direct method, a reconciliation of net income to operating cash flow is still provided in a separate schedule; if you use the indirect method, the amounts of interest and income taxes paid are disclosed². If you need help with either method, online bookkeeping services can keep the underlying records in shape.

Direct cash flow method

The direct method lists the major classes of cash actually received and paid: cash received from customers, less cash paid to vendors and employees, interest, and tax. The result is your net cash from operating activities. It is the easier one for a business owner to read, because every line is money that moved through the bank.

A simple example: a business receives $250,000 from customers and pays $210,000 to vendors and staff, so operating cash flow is $40,000. It spends $25,000 on new equipment (investing, shown as (25,000)) and repays $10,000 of a loan (financing, shown as (10,000)). The net increase in cash is $5,000. With an opening balance of $30,000, the closing balance is $35,000.

Indirect cash flow method

The indirect method starts with net income (from the accrual-based income statement) and adjusts it back to cash. It adds back non-cash expenses such as depreciation, and adjusts for changes in working capital: an increase in money owed by customers is subtracted (you booked the sale but haven’t been paid), and an increase in what you owe vendors is added (you booked the cost but haven’t paid it).

In the same example, net income of $30,000 plus $6,000 of depreciation, less an $8,000 increase in accounts receivable, plus a $12,000 increase in accounts payable, gives the same $40,000 of operating cash flow. The indirect method is useful precisely because it explains the gap between profit and cash. Whoever keeps your books should check that the statement’s totals reconcile to the bank and the balance sheet.

The bottom line

A cash flow statement identifies the cash and cash equivalents coming into and going out of your business, and explains why your bank balance moved differently from your profit. Read it monthly and it tells you whether to chase overdue invoices harder, time a purchase differently, or talk to your lender early. Our guide to cash flow management covers what to do next. It all starts with accurate, reconciled books: receipts, payroll, and invoices recorded on time. You don’t need to analyze the numbers alone. Visory runs bookkeeping, payroll, accounts payable and receivable for growing businesses, and Visory Insights with a Business Performance Partner turns the cash flow picture into decisions.