Quick overview

A cash flow statement shows how cash actually moved during a reporting period. Unlike an income (profit & loss) statement, which records revenues and expenses when they are earned or incurred, the cash flow statement records when cash is received and when it is paid. For both businesses and individuals, it answers the practical question: do I have enough cash to pay bills, invest, or return capital?

(Professional note: In my 15 years advising small businesses and households, I’ve seen clear cash-flow visibility prevent overdrafts, stop bad borrowing decisions, and guide timing for investments.)

Sources: FASB guidance on the statement of cash flows (https://www.fasb.org), U.S. Small Business Administration cash-flow resources (https://www.sba.gov), Investopedia overview (https://www.investopedia.com/terms/c/cashflowstatement.asp).

Why the cash flow statement matters

  • Liquidity check: It shows whether you have cash available for short-term needs (payroll, rent, loan payments).
  • Accuracy beyond profit: Profitable businesses can still run out of cash if revenues are tied up in receivables or inventory.
  • Financing decisions: Lenders and investors use cash flows to judge creditworthiness and the timing of financing needs (SEC and lender guidance emphasize cash flows when underwriting loans).
  • Forecasting and planning: A historical cash flow becomes the basis for a cash flow forecast to manage seasonality and growth.

Helpful reading on cash planning for small businesses: the SBA’s cash flow guidance (https://www.sba.gov/business-guide/manage-your-business/manage-your-cash-flow).

How the cash flow statement is organized

There are three standard sections. Each tells a different story about cash sources and uses.

  1. Operating activities
  • What it covers: Cash generated or used by core operations — cash receipts from customers, cash paid to suppliers and employees, cash paid for operating expenses and taxes.
  • Why it matters: Positive operating cash flow indicates the business can sustain itself without relying on new capital.
  • Example: A café receives cash from daily sales (inflow) and pays wages and rent (outflows).
  1. Investing activities
  • What it covers: Cash used to buy or cash received from selling long-term assets such as equipment, property, or investments.
  • Why it matters: Large negative cash from investing may indicate growth (buying equipment) or capital spending that needs financing.
  • Example: Buying a new oven is a cash outflow in investing activities.
  1. Financing activities
  • What it covers: Cash flows related to debt and equity — borrowing, repaying loans, issuing shares, and paying dividends.
  • Why it matters: Tells you how operations and investments are funded: by debt, equity, or internal cash.
  • Example: A loan draw is an inflow; principal repayment is an outflow.

(These categories follow U.S. accounting standards; see FASB and SEC guidance for public reporting.)

Direct vs. indirect method (simple explanation)

  • Direct method: Lists actual cash receipts and payments (e.g., cash collected from customers, cash paid to suppliers). It’s more transparent but requires detailed records.
  • Indirect method: Starts with net income from the income statement and adjusts for noncash items (depreciation, stock-based compensation) and changes in working capital (receivables, payables, inventory).

Most small businesses use the indirect method because it ties directly to the income statement and is easier to prepare from accrual-based accounting systems.

Source: FASB / accounting practice guides (https://www.fasb.org).

Practical steps to prepare a cash flow statement (monthly)

  1. Gather source documents: bank statements, receipts, invoices, loan statements, and statements of investment transactions.
  2. Start with your net income (if using indirect method). Adjust for noncash charges like depreciation and amortization.
  3. Adjust for changes in working capital: add decreases in accounts receivable and inventory, subtract increases in those accounts; do the opposite for accounts payable.
  4. Record cash flows from investing: asset purchases and sales.
  5. Record cash flows from financing: new loans, repayments, capital contributions, and owner draws/dividends.
  6. Reconcile the net change in cash to the beginning and ending cash balances on your bank statements.

Template note: Many accounting systems can produce cash flow statements automatically. If you prefer a manual template, consider using a spreadsheet or accounting software that produces the indirect cash flow statement.

Quick example (simple numbers, indirect method)

  • Net income: $10,000
  • Depreciation (noncash): +$1,500
  • Accounts receivable increased: -$3,000
  • Inventory decreased: +$500
  • Accounts payable increased: +$800
    Operating cash flow = $10,000 + $1,500 – $3,000 + $500 + $800 = $9,800

Add investing and financing:

  • Purchase equipment: -$6,000 (investing)
  • Loan proceeds: +$10,000 (financing)
    Net change in cash = $9,800 – $6,000 + $10,000 = $13,800

This reconciliation shows how a positive net income can produce an even larger cash balance when financing inflows are included — or shrink if investing outflows dominate.

Forecasting cash flow: a step-by-step approach

  1. Use historical cash inflows (sales receipts, service payments) as a baseline.
  2. Adjust for known seasonal patterns or one-off events (holidays, tax payments, contract renewals).
  3. Build a 12-week rolling cash forecast for short-term needs and a 12-month projection for planning capital expenditures.
  4. Scenario test: run a conservative scenario (lower sales, delayed receivables) and an optimistic scenario to see funding gaps.
  5. Plan actions for shortfalls: accelerate receivables, delay discretionary spending, secure a line of credit.

Practical tip from my advising work: small businesses that model a 12-week rolling forecast avoid most emergency borrowing because they can see upcoming cash gaps early and negotiate terms with lenders in advance.

Useful template and guidance: see our cash flow forecast guide (internal resource: https://finhelp.io/glossary/cash-flow-forecast) and budgeting resources (https://finhelp.io/guides/budgeting).

Common mistakes and how to avoid them

  • Confusing profit with cash: Profit includes noncash items and accruals; check the operating section for actual cash generation.
  • Ignoring timing: Slow-paying customers can cause temporary cash shortages even when sales are strong.
  • Skipping regular updates: A monthly (minimum) cash flow review is best; weekly reviews are recommended for seasonal businesses.
  • Not planning for taxes and owner draws: Owners sometimes forget to reserve cash for estimated tax payments or personal withdrawals.

Fix: Build a reserve line item for taxes and owner draws in your forecast and treat it like a recurring outflow.

Who should prepare and use a cash flow statement

  • Small business owners and managers: for operational planning and loan discussions.
  • Freelancers/independent contractors: to smooth irregular payments and set aside taxes.
  • Individuals: use the same principles for household budgeting and emergency fund planning.

If you aren’t sure how to set up a statement, working with a bookkeeper or CPA for the first few months helps ensure accuracy and gives you a repeatable process.

Frequently asked practical questions

  • How often should I prepare it? Monthly is the minimum; weekly during high season or when cash is tight.
  • Can I prepare one without accounting experience? Yes — start with a bank-activity view and separate operating, investing, and financing items. Software and templates reduce errors.
  • Which method is better? For transparency, the direct method is ideal; for convenience, the indirect method is most commonly used.

Useful checklist before sharing cash flows with lenders or investors

  • Have bank reconciliations for the period.
  • Provide an explanation for large nonrecurring items (asset sales, one-time grants).
  • Include a forward-looking cash flow forecast tied to your assumptions.

Lenders rely heavily on cash flow trends in credit decisions (see SBA lending guidance: https://www.sba.gov).

Conclusion and professional guidance

A cash flow statement is a practical tool that shows the movement of cash and highlights timing mismatches that affect financial health. Regular preparation, simple forecasting, and conservative scenario planning reduce the risk of surprise shortfalls. In my practice advising small businesses and households, clients who commit to monthly cash flow reviews gain control over borrowing decisions and capital timing.

This article is educational and not personalized financial advice. For tailored planning, consult a certified financial planner, CPA, or qualified advisor.

Further reading and internal resources

Authoritative sources cited: Financial Accounting Standards Board (FASB) — https://www.fasb.org; U.S. Small Business Administration (SBA) — https://www.sba.gov; Investopedia — https://www.investopedia.com/terms/c/cashflowstatement.asp.

(Professional disclaimer: Educational content only; consult a licensed professional for advice tailored to your situation.)