A cash flow statement is the financial statement that shows how much cash came into a business and how much went out over a period, such as a month, quarter or year. It sorts that cash into three groups: operating activities, investing activities and financing activities. Added together, they explain why the cash balance at the end of the period is different from the one at the start. It is how you see whether a business can pay its bills, not just whether it made a profit.
The statement of cash flows sits alongside the income statement and the balance sheet as one of the three core financial statements. This guide covers what goes in each section, how to prepare one, a worked example, how to read the result, and the rule changes coming for companies that report under IFRS.
What a cash flow statement shows, and why profit is not the same as cash
The income statement is built on accrual accounting. It records revenue when it is earned and expenses when they are incurred, whether or not any cash has moved. That is why a business can report a profit and still run short of cash. Customers may not have paid yet, inventory may have been bought months ahead of the sale, and a loan repayment reduces cash without touching profit at all.
The cash flow statement strips that back to actual cash movements. The SEC’s guide to the statement of cash flows describes it as showing how cash moves in and out of a business, reconciling the cash balance at the start of the period to the balance at the end. It is also the statement that shows whether operations fund themselves.
The three statements connect. Net income from the income statement is usually the starting point for the operating section. The changes in balance sheet accounts, such as receivables, inventory and payables, explain the gap between that profit and the cash it produced. And the ending cash on the cash flow statement must match the cash line on the closing balance sheet.
The three sections of a cash flow statement
| Section | What it covers | Typical lines |
|---|---|---|
| Operating activities | Cash from running the business day to day | Receipts from customers, payments to suppliers and staff, rent, taxes, interest paid |
| Investing activities | Cash spent on or received from long-term assets and investments | Equipment and software purchases, sale of assets, buying a business |
| Financing activities | Cash from, or returned to, lenders and owners | Loan principal drawn and repaid, equity raised, dividends or owner distributions, share buybacks |
Operating activities
This is the section that matters most for a trading business, because it shows whether the core operation generates cash. It covers money received from customers and money paid for inventory, salaries, rent, utilities, marketing and taxes. Under the indirect method it also adds back non-cash items such as depreciation and amortization, and adjusts for changes in working capital: receivables, inventory and payables.
Investing activities
Investing activities cover cash used for, or generated by, long-term assets. That includes purchases or sales of property, plant and equipment, capitalized software, investments in securities, and acquiring or selling a business. A growing company usually shows a negative number here, because it is buying the assets it needs to expand.
Financing activities
Financing activities show how the business is funded. Drawing down a loan or raising equity brings cash in. Repaying debt, paying dividends or owner distributions and buying back shares takes cash out. Under US GAAP, dividends paid sit in financing, as the SEC guide shows, but interest paid is classified in operating activities, not financing.
The three section totals add up to the net change in cash for the period. Add that to the opening cash balance and you get the closing cash balance, which ties to the balance sheet.
Direct method vs indirect method
There are two ways to present the operating section. The investing and financing sections look the same under both.
| Direct method | Indirect method | |
|---|---|---|
| Starts from | Actual cash receipts and payments | Net income |
| Shows | Cash collected from customers, cash paid to suppliers and staff | Adjustments for non-cash items and working capital changes |
| Strength | Easy to read, shows where cash really came from | Easy to prepare from the income statement and balance sheet |
| Weakness | Needs detailed cash records by category | Harder for a non-accountant to follow |
| How common | Less common; the SEC guide says generally only smaller companies use it | Used by most US companies |
The indirect method is the usual choice because it works from what accrual bookkeeping already produces: the income statement and the balance sheets at the start and end of the period.
How to prepare a cash flow statement, step by step
- Gather the inputs. You need the income statement for the period and the balance sheets at the start and end of it.
- Start with net income. Take it from the income statement.
- Add back non-cash expenses. Depreciation, amortization and similar charges reduced profit but did not use cash.
- Adjust for working capital. An increase in receivables or inventory used cash, so subtract it. An increase in payables or accrued expenses kept cash in the business, so add it. Decreases work the other way.
- Total the operating section. This is cash from operations.
- List investing activities. Asset purchases are outflows; asset sales are inflows.
- List financing activities. New borrowing and equity are inflows; repayments, dividends and distributions are outflows.
- Calculate the net change in cash by adding the three totals, then add the opening cash balance.
- Check it ties. The closing cash must equal cash on the closing balance sheet. If it does not, a balance sheet movement has been missed or double counted.
- Add supplemental disclosures. Significant non-cash transactions, such as equipment bought with a loan, are disclosed separately.
Cash flow statement example
Here is a simplified quarterly cash flow statement for a small consumer brand, prepared with the indirect method.
| Line | Amount |
|---|---|
| Operating activities | |
| Net income | $40,000 |
| Add back depreciation | $8,000 |
| Increase in accounts receivable | ($12,000) |
| Increase in inventory | ($15,000) |
| Increase in accounts payable | $9,000 |
| Net cash from operating activities | $30,000 |
| Investing activities | |
| Purchase of equipment | ($20,000) |
| Net cash used in investing activities | ($20,000) |
| Financing activities | |
| Proceeds from a new loan | $50,000 |
| Loan repayment | ($10,000) |
| Owner distributions | ($5,000) |
| Net cash from financing activities | $35,000 |
| Net change in cash | $45,000 |
| Cash at start of quarter | $30,000 |
| Cash at end of quarter | $75,000 |
What it says: the business earned $40,000 of profit but turned only $30,000 of it into cash, because more money was tied up in customer balances and in stock bought ahead of the next season. It spent $20,000 on equipment, and the cash balance grew mainly because it borrowed $50,000. Operations are funding themselves, but the rise in cash is borrowed, not earned.
How to read a cash flow statement
Start with operating cash flow, then see how investing and financing explain the rest. Harvard Business School Online’s guide makes the point that negative cash flow does not necessarily mean the business is losing money: it can come from a timing mismatch between spending and income, or from a decision to invest in growth, which is why trends over several periods matter more than one. The pattern of the three signs tells a story.
| Operating | Investing | Financing | What it often means |
|---|---|---|---|
| Positive | Negative | Negative | A healthy business funding growth and repaying lenders from its own cash |
| Positive | Negative | Positive | Growing, and borrowing or raising money to grow faster |
| Negative | Negative | Positive | Early stage or struggling; outside money is covering the gap |
| Negative | Positive | Positive or negative | Selling assets to cover operating losses, a warning sign |
Four checks are worth making every period:
- Operating cash flow against net income. If profit is consistently higher than operating cash, look at receivables and inventory.
- Working capital lines. A jump in receivables means slower collections; a jump in inventory means cash is sitting on shelves.
- Free cash flow. It is not a line on the statement; it is usually calculated as operating cash flow minus capital expenditures. In the example above that is $30,000 minus $20,000, or $10,000.
- The trend, not one quarter. One large payment or collection can make a single period look better or worse than the business really is.
What the cash flow statement reveals beyond profit
- Liquidity. Whether there is enough cash to meet payroll, supplier bills and loan payments.
- Quality of earnings. Whether reported profit is backed by cash or propped up by accruals.
- Funding dependence. Whether growth is paid for by operations or by lenders and investors.
- Early warning. Negative operating cash flow, or cash that only rises when new debt is drawn, can flag trouble before the income statement does.
US GAAP vs IFRS, and the IFRS 18 change
Most US businesses report under US GAAP, where the rules sit in ASC 230. As above, interest paid goes in operating activities and dividends paid in financing, with no choice either way.
Companies that report under IFRS face a change. IFRS 18, issued by the IASB in 2024, amends IAS 7 for annual periods beginning on or after January 1, 2027. Under the amended IAS 7, companies using the indirect method must start the operating section from operating profit or loss, and the old choices for classifying interest and dividends go away. For a typical trading company, interest paid and dividends paid move to financing, and interest and dividends received move to investing. Comparative periods have to be restated. IFRS 18 is an IASB standard, so it does not change US GAAP.
Limitations and common misunderstandings
- It looks backward. It reports past cash movements. A cash forecast is a separate tool.
- It leaves out non-cash items. That is its strength, but it also means the cost of assets wearing out does not show up here.
- Timing distorts single periods. A large prepayment or a delayed customer payment can swing one quarter.
- Positive cash flow is not profit. A business can generate cash by stretching suppliers or selling assets while losing money. Negative cash flow can simply mean heavy investment. Read all three statements together.
How Atidiv helps with cash flow reporting
Atidiv’s finance and accounting team keeps the books that a cash flow statement is built from: bookkeeping, monthly bank and card reconciliations and financial statements, prepared inside the accounting system you already use. Our financial reporting work produces income statements, balance sheets and cash flow reports, under US GAAP or IFRS.
See our financial reporting services for statements and management reports, our bookkeeping services for small business, or the wider finance and accounting service. To talk it through, contact us.
Frequently asked questions
What is a cash flow statement?
A cash flow statement is a financial statement that reports the cash that entered and left a business during a period. It groups that cash into operating, investing and financing activities, and reconciles the opening cash balance to the closing one. It shows liquidity, where the income statement shows profitability.
What is the difference between a cash flow statement and an income statement?
The income statement measures profit using accrual accounting, recording revenue when earned and expenses when incurred. The cash flow statement records only actual cash movements. A business can be profitable and still short of cash if customers pay late or money is tied up in inventory.
Which method should I use for the operating section, direct or indirect?
Most businesses use the indirect method, which starts with net income and adjusts for non-cash items and working capital changes. The direct method lists actual receipts and payments. It is easier to read but needs cash records by category, so it is less common.
What does it mean if my business has negative cash flow but shows a profit?
It usually means cash is tied up somewhere profit does not show: unpaid customer invoices, inventory bought ahead of sales, equipment purchases or loan repayments. It is not always a problem, but if operating cash flow stays below net income for several periods, look at collections and stock levels.
Can a cash flow statement help forecast future cash needs?
It gives you the history a forecast is built on. Patterns in receipts, payments, working capital and financing show how cash moves through your business across a year, which makes a forward cash forecast far more accurate.
Is a cash flow statement enough to judge a company’s financial health?
No. Read it with the income statement and the balance sheet. Together they show profitability, what the business owns and owes, and whether it has the cash to keep going.
Why should I consider a service like Atidiv for cash flow reporting?
An outsourced finance team takes on the bookkeeping, reconciliations and reporting that a reliable cash flow statement depends on, so your statements are accurate and on time without adding headcount to your internal team.
Maximilian Straub is the Chief Operating Officer for Guild Capital and oversees all areas of the company's strategic operations and portfolio performance across the world. He is also a board member for Atidiv, supporting its growth initiatives. He served as the Chief Operating Officer and Chief Financial Officer for Spring Place and had previously spent 7 years advising clients in strategy, operational execution and organizational transformation while at McKinsey & Company.