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Everything You Need to Know About Cash Flow Statements

Mona Bushnell

Find out what makes up a cash flow statement and why it's important for your business.

Cash flow is one of the top concerns for your business, so cash flow statements are the first financial statements you’ll create. This overview will help you establish the financial tracking and reporting you’ll need to develop cash flow statements and get a handle on what’s coming in and what’s going out.

What is a cash flow statement?

A cash flow statement, also called a statement of cash flows, is a financial document that shows how money is flowing in and out of your business. Common financing activities – such as securing loans or applying for investment capital – may require this and other types of financial statements.

Cash flow statements are used to evaluate the financial health of a business and to provide a picture of how you spend and invest the money. 

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What’s included in a cash flow statement?

To understand the cash and cash equivalents flowing through your business, you’ll need to put together a cash flow statement, which is usually split into three sections. These are the most common terms, but there may be some variations by industry and region. These are the three sections that are typically included:

Cash flow from operating

Often referred to as “cash from operating activities,” this is usually first. It covers the incoming cash from sales or contracts and the outgoing payments for operational expenses, such as taxes, staff or manufacturing costs. 

Cash flow from investing

The investing section records capital expenditures, acquisitions and divestments. Expenditures and acquisitions are both cash outflows, while divestments are cash inflows. It’s not unusual for this section to primarily consist of cash outflow, as many thriving businesses spend more money investing than they do cashing out investments.

Cash flow from financing

In this section, you’ll detail how your company is funded and distributes its funds. Data in this portion may include transactions concerning company debt and equity. If your company pays dividends to shareholders, you would capture that here.

How to calculate cash flow

To calculate your business’s cash flow, you add or subtract differences in your net income based on information from your balance sheet and income statement. The adjustments are made to revenue, expenses and credit transactions because net income includes noncash items. These are methods used to calculate cash flow:

  • Direct cash flow method: Using the beginning and ending balances of your accounts, calculate all cash payments and receipts. This includes cash payments made to suppliers, cash received from customers, and any cash salary payments.
  • Indirect cash flow method: This method to calculate cash flow starts with net income from your income statement. It only accounts for revenue that has been earned. Next, you adjust any earnings before interest and taxes for transactions impacting your net income. You then add transactions that have no impact on your business’s cash flow, such as depreciation.

Accounts receivable

Cash flow statements should always include changes in accounts receivable during each accounting period. A decrease in accounts receivable indicates an increase in cash from customers who have paid off their accounts. This results in increased net earnings. However, an increase in accounts receivable should be deducted from net earnings because it is not an increase in cash.

Inventory value

An increase in inventory should be reflected as a deduction from net earnings because it indicates money your company has spent (if it was paid in cash). Inventory purchased using credit would be reflected on your balance sheet as an increase in accounts payable, with the increased amount added to net earnings each year.

Why is cash flow important?

Inadequate cash flow can keep your business from expanding. In past surveys, we’ve found that cash flow is not only the most important facet of your business, but it matters to outside investors and lenders too. In fact, many common financing activities require you to provide financial statements, including cash flow.

While the financial health of your company shouldn’t be judged based on one aspect, cash flow is a valuable source that can prove you operate efficiently, pay bills, and grow. These statements are widely considered one of the most important financial statements your business produces. Additionally, tracking cash flow can help you make more accurate future projections.

What is cash flow?

As with anything related to financial math, understanding the jargon is half the battle. You may come across terms like “negative cash flow” and “cash flow from operations.” Here’s what those and other important phrases mean.  

Cash flow

Cash flow is the money going into and out of your business over a period of time, often reported quarterly. It is more informative than profit alone, because it gives a fuller financial picture of your expenses, debts and assets.

Not all assets are part of cash flow. Only short-term investments – typically bonds with a maturation of three months or earlier – should be considered part of cash flow. Longer-term investments are not considered part of your company’s cash flow, since invested money is usually not immediately accessible and can fluctuate with the market.

Positive cash flow

Positive cash flow is when a company’s incoming cash exceeds its outgoing expenses. Reaching a positive cash flow point is a major milestone for new businesses.

Negative cash flow

If your statement shows negative cash flow, this means that during the period being evaluated, your business transferred more money out than it received. Rest assured, this does not indicate that you are in peril. You may go through negative cash flow during certain times of the year if your product or service is seasonal. And if you have a new business, you may keep a negative cash flow until you acquire a consistent client base.

Net cash flow

The difference between outgoing and incoming cash flow is referred to as “net cash flow.” In other words, it represents the change in your business’s cash holdings over the period covered in your statement. Tracking your business’s net cash flow over time can be helpful.

Free cash flow

A company’s free cash flow is the money left over after it has paid all expenses and reinvested money in the business – such as by purchasing equipment, hiring new staff, and making financial investments. Free cash flow is usually of interest to shareholders and is often included on a cash flow statement.

Operating cash flow

Operating cash flow is the money a company generates from its business activities alone, not from investors. This is an essential item on a cash flow statement because it’s an excellent indicator of your business’s strength.

What are other types of financial statements?

Financing activities like applying for loans or courting potential investors often require several financial statements. In addition to a cash flow statement, these three documents may be required, depending on the nature of your business and the financing activities you’re pursuing:

What resources can support cash flow statements?

Financial tracking can be a daunting task. These accounting resources will help you create an efficient cash flow statement.

Accounting software

The best accounting software applications have a preconfigured report for cash flow statements. You can also find an online template if you’re not yet using a software program. If you utilize a template, make sure to choose one that matches your needs and reporting schedule.

Accurate tracking is an important task in managing your business’s finances. Without accurate tracking, even the best template, income statement or balance sheet will be useless. Accounting software that helps you manage your financial tracking usually pays for itself in the short term.

Securities and Exchange Commission

The U.S. Securities and Exchange Commission publishes many helpful guides, such as the Beginner’s Guide to Financial Statement. If you’ve never read a balance sheet or put together a profit and loss statement, it will give you the background you need.

Dachondra Cason contributed to the writing and research in this article. 

Image Credit: fizkes / Getty Images
Mona Bushnell
Staff Writer
I'm a Staff Writer for and Business News Daily.