Cash is the lifeblood of every business. Run out of cash, and you’re dead in the water—you can’t pay your bills or make payroll. 

That’s why understanding your cash flow statement is so important—it shows you how much cash you have in the bank and how cash is moving in and out of your business.

Even if you’re not up and running yet, creating a cash flow forecast (which sets the stage for a working cash flow statement) will help you figure out how much cash you need to get started and stay in business.

What is a cash flow statement?

A cash flow statement tracks how cash is moving into and out of your business over a certain period of time, such as a month or a quarter. 

It shows where cash is coming from and where you are spending money. You can use your cash flow statement to calculate cash flow and determine if your business is spending more cash than it brings in or accumulating cash over time. 

Since cash is generated and used in different ways—the statement is divided into three main sections that group specific cash flow activities: 

• •Cash flow from operations: Cash generated or used for day-to-day business activities.
• •Cash flow from investment: The buying or selling assets.
• •Cash flow from financing: Impact of debt or equity financing.

The cash flow statement is one of three key financial statements used by small businesses—the other two, an income statement (also known as profit and loss) and a balance sheet, complement the cash flow statement. 

When these financial statements are analyzed together they provide a full picture of your business’s finances.

The cash flow formula

You calculate your cash flow with a simple formula: subtract what you paid out (bills paid, for example) from the cash you brought in (your sales, new loans, and other sources of cash).

Cash Flow = Cash Received – Cash Paid Out

For example, last month, if you paid $10,000 in bills and received $15,000 in cash transactions from your customers, your total cash flow would be $5,000. 

Unfortunately, real-world cash flow calculations are often trickier than the example I shared. 

So, I recommend using a cash flow forecasting tool like LivePlan to help you build a cash flow statement. No complicated calculations, checking formulas, or manual updates are required. 

You can also download a free cash flow statement template. There’s more room for manual error, but it still comes pre-built with the correct formulas and formatting to build a working cash flow statement. 

How to prepare a cash flow statement

Let’s look at each row in a cash flow statement so you can make your own. I’ll go line-by-line and explain each section and where the numbers come from.

For this article, I’ll be using the indirect method of calculating cash flow, which is what most accounting systems utilize. Creating a cash flow statement using the indirect method starts with your net income and adjusts for non-cash and working capital changes.  

While I won’t cover it in this article, you can also use what’s called the direct method to create your cash flow statement. This approach has you list cash inflows and outflows directly without adjusting from your net income.

Both methods are viable and will give you the same result, but since the indirect method is most common (and it’s what we use at LivePlan) that’s what I’ll be covering today. 

If you want to see what a complete cash flow statement looks like, skip ahead to the next section.

Cash from operating activities

The first section of your cash flow statement covers cash flow generated from operations. It serves as a measurement of your business’s regular cash inflows and outflows as well as your ability to pay off debt in the short-term. 

Net profit

The net profit on your cash flow statement is your profits from your profit and loss statement (P&L). 

If the number is negative, this means that you took a loss—your expenses were greater than the sales that you made during that month.

Calculating your cash flow starts with your net profit and then makes adjustments to it (additions and subtractions) to figure out exactly how much cash is left in the business at the end of the month.

Depreciation and amortization

When you purchase an asset (like a vehicle or other large piece of equipment), the cost of that asset is spread out over time on your Profit and Loss Statement, even if you paid cash up-front for the asset. 

This is called depreciation.

How an asset is depreciated is regulated by the government. Some asset purchases can be expensed on the profit and loss statement immediately, while others need to be expensed slowly over many months or years.

On the cash flow statement, we deal with the depreciation expense by adding it back in, since it was subtracted as an expense on your profit and loss statement.

Change in accounts receivable

If you bill your customers and they pay you 30 or 60 days later, you have accounts receivable—the amount of money owed to you by customers. 

The accounts receivable line in your cash flow statement doesn’t show the total amount of money owed to you. It instead shows the change to accounts receivable.

If the number is positive, customers that owe you from previous months paid you, and you deposited their money in your bank account. If the number is negative, customers owe you more money than last month.

Change in inventory

If your company sells a product, you probably have inventory. 

When you purchase inventory, you don’t count it as an expense on your profit and loss statement. Instead, the cost of that inventory purchase shows up here on your cash flow statement. 

You’ll expense the inventory as you sell it, and that’s when it will show up on your profit and loss as a cost of goods sold.

So, if you have a negative number here, that means that you’ve purchased more inventory than you’ve sold. Your products are still on your shelves. 

If you have a positive number, that means that you have purchased less inventory than you have sold.

Example:

This might not seem possible but consider this example: 

A bike shop might only buy new bikes two or three times a year. In those months when the shop purchases a lot of bikes, there will be a big negative number in the inventory line of the cash flow statement. In the following months as the shop slowly sells that inventory, the inventory number will become positive.

Change in accounts payable

Accounts payable is when you owe money to your vendors and suppliers. 

Just like how your customers might not pay you right away, you might not pay your vendors right away when you get the bill. Accounts payable keeps track of how much you owe.

The cash flow statement shows how much your accounts payable balance has changed. 

If the number here is positive, you have received new bills during the month that you need to pay but you haven’t paid yet. If the number is negative, you have paid down more bills than you received during the month.

Change in income taxes and sales tax payable

If you collect sales tax (or VAT, HST, GST, and so on) on sales, and then have to give that money to the government—you’ll show how much money was paid out in the sales tax payable row. 

For sales taxes:

• •A positive number = Collected tax from customers in the past month but not paid to the government yet.
• •A negative number = Paid more money to the government than you collected from customers.

This happens because there is often a lag of at least a month between when you collect sales taxes from customers and pay sales taxes to the government.

If you pay income taxes, you’ll record those payments on an income taxes row.

The income tax row offsets the income taxes that you expensed on your profit and loss statement but haven’t paid to the government yet. When you do make an income tax payment, you’ll record that in this row of the cash flow statement.

Cash from investing activities

This section of your cash flow statement covers cash generated or spent on longer-term investments or assets for your business—such as property, equipment, or investment in securities. 

Assets purchased or sold

When you buy an asset, like a vehicle or a piece of equipment, you’ll subtract the cash you used to make that purchase.

If you borrow money to buy an asset, you’ll deal with how you receive the money from the loan and subsequent loan payments in the “changes to debt” lines of the cash flow statement.

If you sell an asset, the proceeds from that sale will show up here.

Cash from financing activities

Cash flow from financing activities involves transactions related to borrowing or repaying debt (ie. loans), issuing or buying back stock, and paying dividends to shareholders.

Investments received

If you get investors to invest in your company, you’ll show that incoming cash here, on this line. For example, if an investor gives you $100,000 in June, you’ll show that entire influx of cash in your June cash flow statement.

Dividends and distributions

If your company pays out dividends to its owners or makes any other kind of cash distribution that isn’t salary, you’ll show that number here.

Change in short-term debt and change in long-term debt

These two lines, short term debt and long term debt, operate the exact same way, but are split up to differentiate the types of loans or debt your company is taking on.

Short-term debt is usually paid back within a year, while long-term debt can take much longer to pay off. 

If the numbers here are positive, you’ve brought more cash into your business from loans that month than you’ve paid off. If the number is negative, you are paying off more than you have borrowed during that month.

Example:

• •You get a loan from the bank in June for $25,000.
• •It’s payable over two years.
• •You don’t start paying anything back until August.

So, $25,000 will appear in the long-term debt row for June. Nothing will appear there in July, and then in August, you start paying back in equal installments that appear as negative numbers.

Cash at beginning of period

This is how much cash you have at the start of the reporting period. 

Here, you’re only talking about cash on hand in the bank. If the reporting period for your cash flow statement is one month, this is how much cash you had in the bank at the beginning of the month.

You’ll apply all of the various changes to your cash that happened during that period to this number—that’s what all the other rows in the cash flow statement do.

Net change in cash

Once you’ve totaled up all of the changes in cash that have happened during your reporting period, you’ll show that number here.

This is your net cash flow. It’s basically the sum total of all the lines that we’ve defined here in this article (except for “cash at beginning of period”).

Cash at end of period

Finally, take your cash from the beginning of the period, add (or subtract) the change in cash during the period, and you’ll end up with how much cash you have at the end of the period.

Cash flow statement example

Here’s an example of what a complete cash flow statement looks like. 

Keep in mind that you need a month-to-month cash flow statement for at least the current year of operations. You’ll use this to track your performance, update your cash flow forecast, and do consistent monthly analysis.

How to read and use your cash flow statement

Analyzing your cash flow statement comes down to one thing—is your cash flow positive or negative? 

Positive cash flow

A positive cash flow number means that you are adding cash to your bank account. 

If this is excess cash flow (ie. more than expected) it may be a sign that you can reinvest in your business, pay off additional debt, or explore new growth opportunities.

One vital thing to remember is that cash and profits are not the same. 

Businesses can be profitable and lose cash at the same time. You can also be cash flow positive and not profitable.

These terms are unfortunately used interchangeably all too often when describing business growth—which can get you into trouble if you show high profitability but run out of cash in the process.

Negative cash flow

A negative cash flow number means that you are burning through cash and potentially shrinking your cash runway. If left unchecked, you could run out of cash.

If this is unexpected your next steps are to immediately understand if:

• •Cash flow has been trending down over previous months
• •Accounts receivable have increased
• •Accounts payable have decreased
• •Net profit was lower than expected

Negative cash flow can also occur when a business decides to reinvest in growth. In this case, a decrease in cash is expected and should not be cause for concern unless you wildly missed projections.

Additional things to consider when reviewing cash flow

You need to keep your business operations, decisions, and goals in mind when reviewing your cash flow statement. Depending on your expectations, negative or positive cash flow can be a good or bad sign for your business. 

This should lead you to dig deeper and ask questions like:

• •How is your business performing from one period to another?
• •How liquid is your business?
• •Will you run out of cash? When will it happen?
• •Are you reinvesting cash to grow your business?
• •Are payment terms stressing your cash flow?

So, use positive and negative cash flow as your top-level signal for what to look at next. It can speed up your review and help you identify critical opportunities or issues with your cash before it’s too late.

Cash flow statement vs cash flow forecast

A cash flow forecast is only different from a cash flow statement in that the forecast is predicting the future of your cash flow while the statement shows what happened in the past.

If you’re just starting and have no financial data—you’ll start by creating a cash flow forecast. If you’re an up-and-running business, you should already have a cash flow statement and can use it to create a cash flow forecast.

The point is you should have both. 

Look behind and look ahead

When you use your cash flow statement and cash flow forecast together you can review the historical performance of your cash and look ahead at your future cash position. 

Look back to identify trends in cash flow. Use that context to predict and plan for future cash stockpiles or cash crunches.

That way you can identify issues or opportunities early on and better understand how much cash you’ll have in the coming weeks and months. If you see yourself running out of cash in the near future, you can start making changes now before you run out. 

However, if you don’t review your cash performance and update your forecast you’ll lack this foresight and will keep burning through cash until it’s too late.

Keeps your projections up-to-date and accurate

If you create a cash flow forecast, you can update it with your actual results from your statement on a monthly basis. This keeps your projections on track and allows you to see where real-world events differ from your expectations.

If you’ve done the formulas in your forecast correctly, or if you’re using cash flow forecasting software like LivePlan, your forecast will automatically update with more accurate predictions of the future based on your past performance.

For example, if you’re forecasting for the next 12 months starting in January, you can replace your forecasted numbers for January with your actual results when January is complete.

Following this pattern becomes more and more important as each month passes. If you don’t update your forecast, it will slowly diverge from reality and become less and less accurate—leading to potential cash flow issues that could have been avoided. 

When your forecast of future cash is driven by the knowledge of what your current cash balance is, you’ll get a much more accurate picture of the future health of your business.

Use your cash flow statement as a management tool

I hope this helps you make sense of your cash flow statement. While It may seem complex, just remind yourself that it’s simply the cash moving into and out of your business.

When you have a solid understanding of your cash flow statement, it will become an essential tool for managing your business. It becomes especially important when things aren’t going quite to plan or there’s a change to the larger business environment that is impacting your business.

More importantly, you should forecast cash flow regularly. Compare your forecast to what actually happened (your “actuals”) on your cash flow statement to ensure that you have enough cash on hand to keep your business running. 

After all, it’s much easier to open a line of credit or get a business loan when your business is healthy rather than being in the middle of a cash crunch.

If you aren’t tracking your cash flow, download our free cash flow statement template. It’s enough to start forecasting cash flow expectations and record real-world data. 

If this is too time-consuming, consider signing up for LivePlan. LivePlan’s guided cash flow forecast builder, accounting software integrations, and AI-powered monthly review take the guesswork out of small business financial planning. 

Check out LivePlan today and take control of your cash flow.

FAQ

Is a cash flow statement different from a free cash flow statement?

Yes, these statements are different. A cash flow statement shows all cash inflows and outflows, while the free cash flow statement focuses on cash available after operating expenses and capital expenditures.

What does the cash flow statement show?

Your cash flow statement shows how cash moves through a business, detailing cash from operating, investing, and financing activities.

Where does interest expense go on the cash flow statement?

Any interest expense is listed under operating activities within your cash flow statement.

Where do dividends go on the cash flow statement?

Any dividends paid are recorded under financing activities within your cash flow statement.