A cash flow statement shows the real movement of money through a business, answering the crucial question lenders ask: Can this business actually pay back a loan?
Unlike an income statement, which records profit including non-cash items like depreciation, the cash flow statement focuses solely on cash coming in and out. This makes it the most direct indicator of liquidity.
The Statement’s Three Key Sections:
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Operating Activities: This tracks cash generated by core business functions, such as cash received from customers and cash paid for expenses like wages, rent, and taxes. Lenders look for consistent positive cash flow here, as it confirms the business can sustain operations without relying on new debt or asset sales.
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Investing Activities: This shows cash used for or gained from purchasing or selling long-term assets like equipment or property. Negative cash flow here often indicates investment in growth, which can be positive, while regular asset sales to cover expenses are warning signs.
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Financing Activities: Covers cash exchanges with lenders and owners—loans received or repaid, equity contributions, and dividends paid. Lenders analyze this section to understand the company’s debt management history.
Why It Matters to Lenders:
Profit doesn’t always equal cash. A business might show profits on paper but still struggle to pay debts if its money is tied up in unpaid invoices. The cash flow statement cuts through this by showing actual cash liquidity.
According to the U.S. Small Business Administration, poor cash flow management is a leading cause of small business failure, which is why lenders heavily weigh this statement during loan evaluations.
For small business owners, reviewing the cash flow statement regularly—monthly, for example—provides early warnings about financial health and the ability to meet loan payments.
Learn More: Explore how cash flow interacts with other financial documents like the income statement and understand loan processes better in our business loan application guide.
References:
- U.S. Small Business Administration: Why a Cash Flow Statement Is Important
- Investopedia: Free Cash Flow Definition
- Forbes Advisor: How to Read a Cash Flow Statement
