What is Cash Flow Statement?
The cash flow statement shows how cash moved into and out of a business, grouped into operating, investing and financing activities.
The cash flow statement explains why your bank balance changed during a period, something neither the profit and loss nor the balance sheet shows directly.
Three sections
- Operating activities: cash from day-to-day business, usually calculated by starting with net income and adjusting for non-cash items such as depreciation and for changes in receivables, inventory and payables
- Investing activities: cash spent on or received from long-term assets, such as buying equipment or selling a vehicle
- Financing activities: cash from or to lenders and owners, such as loan proceeds, principal repayments, owner contributions and draws or dividends
The total of the three equals the change in cash for the period.
Why profit and cash differ
- Customers have not paid yet, so receivables grew
- Inventory was bought ahead of sales
- Loan principal was repaid
- Equipment was purchased
- Owners took draws or distributions
Each of these uses cash without reducing profit, or the reverse.
How to use it
Review the cash flow statement monthly alongside the profit and loss. If operating cash flow is consistently lower than profit, look at receivables and inventory. If financing activities are funding operations month after month, the business may be relying on debt or owner money to stay afloat.
Forward-looking
The statement looks backward. A cash flow forecast looks forward; see cash flow basics. The SBA's managing your finances guidance describes the three main financial statements together. See also working capital.
Related terms
- Assets: Assets are resources a business owns or controls that are expected to provide future economic benefit.
- Net Income: Net income is what remains after all expenses are subtracted from revenue for a period.
- Working Capital: Working capital is current assets minus current liabilities, the resources available to run day-to-day operations.
- Balance Sheet: A balance sheet shows what a business owns, what it owes and the owners' equity at a specific date.
Browse more definitions in the small business glossary.
FAQs
Frequently asked questions
Why is my cash flow lower than my profit?
Common reasons include growing receivables, inventory purchases, loan principal payments, equipment purchases and owner draws.
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