Cash Flow Statement: What It Is and How to Prepare

Profit on paper doesn’t pay the bills — cash does. A cash flow statement shows exactly where money came from and where it went over a period, and it’s one of the three core financial statements every owner should understand.

Percentage of small businesses that fail due to poor cash flow: 82% ·
Number of sections in a cash flow statement: 3 ·
Standard accounting standard for cash flow statements: IAS 7 ·
Typical time period covered by a cash flow statement: Quarterly or annually ·
Primary regulatory body requiring cash flow statements for public companies in the US: SEC

Five key facts, one pattern: the cash flow statement lives at the intersection of accounting rules and real business survival.

What is the cash flow statement?

Definition and purpose

• A cash flow statement shows the cash and cash equivalents a company generated and used during a reporting period (IFRS Foundation IAS 7).
• It is one of the three core financial statements, alongside the income statement and balance sheet.
• It helps assess liquidity, solvency, and financial flexibility (HBS Online).

Key components: operating, investing, financing

• The statement is typically organized into operating, investing, and financing sections (IFRS Foundation IAS 7).
• Float Financial notes that the cash flow statement summarizes cash inflows and outflows over a specific period, usually a month, for business reporting (Float Financial).

The implication: without a cash flow statement, a business owner is flying blind on the one metric that keeps the doors open.

What are three types of cash flow statements?

Operating activities

• Operating activities include cash from core business operations: cash receipts from customers and cash payments to suppliers, employees, and operating expenses (Ramp).

Investing activities

• Investing activities cover the purchase or sale of long-term assets such as machinery, vehicles, or property (Float Financial).

Financing activities

• Financing activities include loan proceeds, loan repayments, interest paid, and dividends paid (Float Financial).

What this means: each section tells a different story—operations show whether the core business generates cash, investing shows future capacity, and financing shows how the business is funded.

How do you prepare a cash flow statement?

Step 1: Gather financial data

• Start with the income statement, balance sheet, and detailed records of cash transactions from your accounting system (HBS Online).

Step 2: Choose direct or indirect method

• IAS 7 permits two methods: the direct method (actual cash receipts and payments) and the indirect method (starts with net income, adjusts for non-cash items) (IFRS Foundation IAS 7).
• The IFRS Foundation encourages entities to use the direct method (IFRS Foundation IAS 7).

Step 3: Calculate net cash from operating activities (direct method)

• List actual cash receipts from customers and cash payments to suppliers, employees, for operating expenses, interest, and taxes. Then subtract total payments from total receipts (Ramp).
• Bench Accounting explains that the direct method keeps a record of cash as it enters and leaves the business and uses that information to prepare the statement at the end of the month (Bench Accounting).

Step 4: Calculate net cash from investing activities

• Record cash paid to acquire long-term assets and cash received from selling them (Float Financial).

Step 5: Calculate net cash from financing activities

• Include cash from issuing debt or equity, loan repayments, and dividends paid (Float Financial).

Step 6: Reconcile to beginning and ending cash

• Sum the net cash from operating, investing, and financing activities, then add to the beginning cash balance to arrive at the ending cash balance (HBS Online).

The pattern: both methods produce the same net cash flow, but the direct method gives a clearer picture of actual cash movements. For small business owners using cash-basis accounting, the direct method is often more intuitive (QuickBooks Global).

What are five rules of cash flow?

Rule 1: Cash is king

• Positive cash flow is essential for survival. Profit is an accounting concept; cash is actual money (Bench Accounting).

Rule 2: Understand your cash conversion cycle

• The cash conversion cycle measures how fast cash is turned into inventory and back into cash. Shortening this cycle improves liquidity.

Rule 3: Forecast regularly

• Regular forecasting helps avoid cash crunches. The cash flow statement is a backward-looking record; a forecast looks forward (Float Financial).

Rule 4: Separate personal and business cash

• Mixing accounts makes it impossible to track true business cash flow. Maintain separate bank accounts and use a business accounting system.

Rule 5: Monitor accounts receivable and payable

• Late-paying customers and early supplier payments both drain cash. Track aging reports and negotiate terms that favor your cash position.

The trade-off: chasing growth without monitoring these five rules leads to profitable companies that still run out of cash. The U.S. Chamber of Commerce emphasizes that understanding cash flow is a core survival skill for any business owner (U.S. Chamber of Commerce CO).

How to explain cash flow to dummies?

Simple analogy: cash flow as a bathtub

• Think of cash flow as a bathtub. The faucet is money coming in (inflows), the drain is money going out (outflows). Net cash flow is the water level—if the drain is faster than the faucet, the tub empties.

Key terms: inflow, outflow, net cash

• Inflows come from sales, loans, or investments. Outflows go to expenses, asset purchases, or debt payments. Net cash is inflows minus outflows over a period.

Why cash flow differs from profit

• Profit includes non-cash items like depreciation and accruals. Cash flow only counts actual money received and paid. A business can be profitable on the income statement but still run out of cash (Bench Accounting).

The catch: many new entrepreneurs confuse profit with cash. The cash flow statement reveals the real story—whether the business has the money to pay its bills this month.

“Entities are encouraged to report cash flows from operating activities using the direct method.”

IFRS Foundation IAS 7 (the international accounting standard-setter)

“The cash flow statement summarizes cash inflows and outflows over a specific period and is split into three main sections: operations, investing, and financing.”

Float Financial (cash flow forecasting platform)

“Under the direct method, operating cash flows are presented by major classes of gross cash receipts and gross cash payments.”

IFRS Foundation IAS 7

The cash flow statement is not just a compliance requirement handed down by regulators like the SEC (U.S. securities regulator) and the FASB (U.S. accounting standards board). For small business owners using tools like Employment Hero to manage payroll (a key operating cash outflow), the direct method offers a transparent way to see where cash is going each month. And those who rely on business credit products such as a Bankwest credit card need the cash flow statement to plan repayment cycles and avoid interest traps.

For small business owners, the choice is clear: invest time in learning the direct method now, or risk running out of cash later. The data is in your accounting system already; the cash flow statement simply tells the story of whether your business is actually making money.

For a deeper dive into the three sections and practical examples, see this complete guide to reading and analysis.

Frequently asked questions