Cash flow statements might seem intimidating at first glance, but they’re actually one of the most practical financial tools available to you as a business owner. Unlike some financial reports that feel disconnected from day-to-day reality, a cash flow statement shows you exactly where your money is coming from and where it’s going.
Let’s walk through what these statements actually look like, with examples that make the format clear. By the end of this post, you’ll be able to read your own cash flow statement with confidence.
The Basic Structure: Three Key Sections
A cash flow statement always has three main sections, each focusing on a different aspect of how money moves through your business:
- Operating Activities – Money moving as part of your core business operations
- Investing Activities – Money spent on or received from long-term investments
- Financing Activities – Money received from or paid to lenders and investors
These three sections are followed by a summary that shows:
- The net change in cash for the period
- The cash balance at the beginning of the period
- The cash balance at the end of the period
This structure is universal, whether you’re running a corner bakery or a multi-million dollar manufacturing company.
How Each Section is Formatted
Let’s explore how each section is typically presented:
Section 1: Cash Flow from Operating Activities
This section shows how much cash your core business operations generate or consume. There are two ways to present this information: the direct method and the indirect method.
The Indirect Method (most commonly used):
- Starts with net income (from your income statement)
- Adds back non-cash expenses (like depreciation)
- Adjusts for changes in working capital (like inventory or accounts receivable)
It typically looks something like this:
Cash Flows from Operating Activities:
Net Income: $85,000
Adjustments to reconcile net income to net cash:
Depreciation: $15,000
Decrease in Accounts Receivable: $8,000
Increase in Inventory: ($12,000)
Increase in Accounts Payable: $7,000
Net Cash Provided by Operating Activities: $103,000
The Direct Method (less common but more intuitive):
- Simply lists cash received and cash paid out
- Shows actual cash inflows and outflows
It looks like this:
Cash Flows from Operating Activities:
Cash received from customers: $410,000
Cash paid to suppliers and employees: ($290,000)
Interest paid: ($8,000)
Income taxes paid: ($9,000)
Net Cash Provided by Operating Activities: $103,000
The end result is the same with either method – you see how much cash your business operations generated or consumed.
Section 2: Cash Flow from Investing Activities
This section shows cash used for or provided by investments in long-term assets. It’s usually formatted as a simple list of investment activities:
Cash Flows from Investing Activities:
Purchase of property and equipment: ($35,000)
Sale of old equipment: $4,500
Purchase of investments:($10,000)
Net Cash Used in Investing Activities: ($40,500)
For small businesses, this section often shows negative numbers, as you invest in equipment and facilities to grow your business. That’s not necessarily bad – it means you’re building capacity for future growth.
Section 3: Cash Flow from Financing Activities
This section tracks cash from debt and equity financing activities. It shows how you’re financing your business beyond its earned income:
Cash Flows from Financing Activities:
Proceeds from bank loans: $20,000
Repayment of loans: ($15,000)
Dividend payments: ($5,000)
Net Cash Used in Financing Activities: $0
The Bottom Line: Net Change in Cash
The final part of the statement summarizes the overall cash movement:
Net Increase in Cash and Cash Equivalents: $62,500
Cash and Cash Equivalents, Beginning of Year: $45,000
Cash and Cash Equivalents, End of Year: $107,500
This bottom line tells you whether your business’s cash position improved or deteriorated during the period, and by how much.
A Complete Example Cash Flow Statement
Let’s put it all together with a complete example for a fictional small retail business:
MAIN STREET BOUTIQUE
Statement of Cash Flows
For the Year Ended December 31, 2024
Cash Flows from Operating Activities:
Net Income: $85,000
Adjustments to reconcile net income to net cash:
Depreciation and Amortization: $15,000
Changes in assets and liabilities:
Decrease in Accounts Receivable: $8,000
Increase in Inventory: ($12,000)
Increase in Accounts Payable: $7,000
Net Cash Provided by Operating Activities: $103,000
Cash Flows from Investing Activities:
Purchase of Property and Equipment: ($35,000)
Sale of Old Equipment: $4,500
Purchase of Short-term Investments: ($10,000)
Net Cash Used in Investing Activities: ($40,500)
Cash Flows from Financing Activities:
Proceeds from Bank Loan: $20,000
Repayment of Long-term Debt: ($15,000)
Dividends Paid to Owners: ($5,000)
Net Cash Provided by Financing Activities: $0
Net Increase in Cash and Cash Equivalents: $62,500
Cash and Cash Equivalents, Beginning of Year: $45,000
Cash and Cash Equivalents, End of Year: $107,500
What story does this statement tell? Our fictional boutique:
- Generated strong positive cash flow ($103,000) from its core business operations
- Invested $40,500 in equipment and investments for future growth
- Neither increased nor decreased its financing (balanced new loans with repayments and dividends)
- Ended with $62,500 more cash than it started with
- Has a healthy ending cash balance of $107,500
This boutique is in a strong cash position, with operations generating enough cash to fund investments and maintain its financing obligations.
Different Formats for Different Purposes
While the basic structure remains consistent, cash flow statements can vary in format depending on:
Company Size and Complexity
- Small businesses often have simpler statements with fewer line items
- Larger companies may have more detailed breakdowns in each section
Reporting Standards
- US GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards) have slight differences in preferred formats
- Public companies follow more rigid formatting requirements than private businesses
Internal vs. External Reporting
- External statements (for banks or investors) follow standard formats
- Internal statements might include more detail in areas management wants to monitor closely
Direct vs. Indirect Method
As mentioned earlier, the operating activities section can be presented using either:
- The indirect method (starting with net income and making adjustments)
- The direct method (showing actual cash receipts and payments)
Most small businesses use the indirect method because it’s easier to prepare from existing financial records.
How Cash Flow Statements Connect to Other Financial Statements
The cash flow statement doesn’t exist in isolation – it’s part of a trio of essential financial statements:
- Income Statement (shows profitability)
- Balance Sheet (shows what you own and owe)
- Cash Flow Statement (shows movement of cash)
The connections between these statements are important to understand:
- The net income figure at the top of the cash flow statement comes from your income statement
- Changes in assets and liabilities (like inventory and accounts payable) come from comparing your current and previous balance sheets
- The ending cash balance on your cash flow statement should match the cash amount on your balance sheet
This interconnection means that errors in one statement will affect the others, which is why accuracy is crucial across all your financial reporting.
How to Read Your Cash Flow Statement: What to Look For
When reviewing your cash flow statement, pay attention to these key insights:
1. Cash from Operations
This is the most important number for sustainable business health. If it’s consistently positive, your core business is generating cash rather than consuming it.
2. Operating Cash vs. Net Income
If your net income is much higher than your operating cash flow, investigate why. Common reasons include:
- Customers aren’t paying (growing accounts receivable)
- You’re building up too much inventory
- You’re delaying payments to suppliers (which isn’t sustainable long-term)
3. Investment Spending
Look at whether your investing activities reflect your strategic plans. Are you investing enough in growth? Or possibly overspending on assets?
4. Financing Dependency
If you’re consistently bringing in cash through financing while operations consume cash, you may have a fundamental business model problem that needs addressing.
5. Cash Trend Over Time
Compare cash flow statements across multiple periods to spot trends. Is your cash position consistently improving or deteriorating?
A Small Business Owner’s Perspective
As a small business owner, your cash flow statement is like a report card on how well you’re managing the actual dollars moving through your business. It’s much more than an accounting exercise – it’s a practical tool that can help you:
- Know if you’ll have enough cash to make payroll next month
- Decide if you can afford that new piece of equipment
- Determine whether you need to speed up customer payments
- See if your business model is sustainable in the long run
Think of your cash flow statement as the financial equivalent of a fitness tracker – it gives you real-time feedback on the financial health of your business, allowing you to make adjustments before small issues become major problems.
Conclusion: From Format to Function
Now that you understand what a cash flow statement looks like and how it’s structured, you can move beyond just recognizing the format to actually using it as a decision-making tool for your business.
The format might seem formal and accounting-heavy, but beneath that structure is a simple story: where did your money come from, where did it go, and how much do you have left? Understanding that story is essential for any business owner who wants to build a sustainable, profitable company.
The next time you look at your cash flow statement, don’t just check the bottom line. Take time to understand what each section is telling you about your business operations, investments, and financing. Your future business decisions will be much better for it.
Remember, cash is king in small business. Your profit might look good on paper, but it’s the cash in your bank account that pays the bills.