What Is a Cash Flow Statement?

So when cash flows into your business—whether in the form of sales, loans, or investor money—some of it will flow out. It might end up in employee paychecks, building maintenance costs, or rent payments, and it’s up to you to track how much comes in and where it goes.

That’s where cash flow statements come in.

A cash flow statement details all your sources of cash, including sales and shareholder investments. It also breaks down where that money goes so you can see if your business is making more money than it spends.

Your cash flow statement is one of your business’s most important financial documents. Along with your profit and loss statement and balance sheet, it shows whether your business is on the path to success, and if not, how you can get back on track.

Cash flow statements split your inflow and outflow of cash into three main categories:

• Cash flow from operating activities
• Cash flow from investing activities
• Cash flow from financing activities

Cash flow from operating activities means all cash that comes from or goes into your business’s daily operations. You can also think of cash from operating activities as cash related to revenue, so any money you spend or make on a product, plus any wages you pay workers who help make that product, falls under this category. So do income taxes, rent payments, interest rates, and any other cash flow that impacts how much money your business earns in daily profit.

Cash flow from investing activities means any cash earned or lost on activities like buying or selling an asset—say, a piece of property or equipment. Unlike operating activities, which include daily, short-term gains and expenses, investing activities are all about the long term; money from assets like equipment or long-term investments falls under this category. These types of assets are also called non-current assets.

The investing activities section also tells you your capital expenditures (a.k.a. capex, CapEx, or CAPEX). Capital expenditures are the money you use to reinvest in your physical assets—things like upgrading your bakery’s refrigerators or even building a whole new manufacturing plant. These kinds of expenses are considered investments in your company’s future, not a typical expenditure.

Cash flow from financing activities means money gained or spent financing your business. This includes shareholders’ equity, the amount of money investors have put into your company via loans or stock, and any other money flowing between you and your creditors.

Looking at a cash flow statement will tell you if you have negative cash flow or positive cash flow. If the former, you’re losing more money than you’re gaining, which could mean it’s time to cut costs and figure out how to up your revenue. If the latter, you’re in a good position to expand and invest in your company’s future.

Cash flow statements give you and your potential investors a lot of crucial information, but one of the most important is free cash flow. Free cash flow, or FCF, is the money remaining when you subtract your capital expenditures from your operating cash flow.

A high FCF usually means your company is growing, so investors can buy stock at a lower cost while expecting their investment’s value to increase soon. Meanwhile, a low FCF tells investors your company isn’t doing well, so your shareholders’ equity isn’t likely to increase anytime soon.

There are two different types of cash flow statements: direct and indirect. The main difference between the two is how they calculate cash from operating activities.

Indirect cash flow statements are much more common. They start the operating activities section with your company’s net income, or the money you have after deducting expenses. (Hint: find your net income using a profit and loss statement, which is also called an income statement.)

From the net income, you adjust for non-cash items that still impact your bottom line, like depreciation and amortization.

Why do most businesses use indirect cash flow statements? It’s because non-cash aspects of your business’s finances impact the money you make from daily operations. Incorporating those non-cash assets into your cash flow statements gives you a better picture of how well you’re really doing financially.

In contrast, direct cash flow statements leave out the non-cash aspects of your cash flow from operations. These statements don’t start out with the net income—instead, they simply show how much you earn and how much you spend by listing every cash payment and receipt over a given time period.

If you read that and think, “Yikes, listing every cash payment and receipt on one document sounds super time-consuming and not all that helpful,” you’re right. In general, direct cash flow statements take too much time for the average small-business owner to prepare. Plus, they lack the big-picture accuracy of indirect cash flow statements.

By now, you’ve gathered that cash flow statements are complicated, tricky, and time-consuming. So if you want to write your own, start by downloading a cash flow statement template. For instance, if you use Microsoft Office, a free 12-month cash flow template for Excel will set you up with the basics.

Alternatively, turn the task over to an accountant. They’re paid to deal with the kinds of complexities that cash flow statements demand. Or you can look for accounting or bookkeeping software that draws up reports for you. Either way, you won’t have to worry about calculating your own capex or FCF; an accountant or a software program can do it for you.

Cash flow statements can be complicated, so it’s okay to be intimidated if you’ve never prepared one before. But since they show exactly how much cash you have at a given moment, cash flow statements are the one financial document you can’t do without. Put one together the next time you want to see where your cash is going, where it’s coming from, and how you want to spend or save it.

Want help preparing a cash flow statement? Finding accounting software for your small business can help streamline your financial statements.

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