The cash flow statement shows actual cash inflows and outflows of a business over a specified period of time, usually a month or a quarter. The statement then compares cash received to cash spending to determine if a business is cash flow negative or positive. The cash flow statement also often shows how much cash a business has on hand at the end of a given period of time.
A cash flow positive business is receiving more cash than it is spending. Likewise, a cash flow negative business is spending more cash than it is receiving.
Cash Flow Statement Example
Following is an example of what a cash flow statement looks like:
The Two Types of Cash Flow Statements
There are two different types of cash flow statements that a business may produce: An indirect cash flow statement and a direct cash flow statement.
Indirect cash flow statement
The indirect cash flow statement is more popular because it can be easily created from reports produced by accounting software. That said, it can be more difficult to use for cash flow forecasting.
For more details on the indirect method of cash flow forecasting, read The Indirect Cash Flow Method: How to Use It and Why It Matters. Also, read our guide that explains every row of an indirect cash flow forecast.
Direct cash flow statement
The direct method simply totals up cash received and cash spent and then compares the two numbers to arrive at a cash flow number.
For more details and explanations about the direct cash flow statement, read our guide on forecasting cash flow that explains the direct method in detail.
How to Use a Cash Flow Statement
While the Income Statement (also known as the Profit & Loss Statement) usually gets all the attention, the cash flow statement is arguably the more important financial statement to review when you’re looking at a business’s books.
The cash flow statement shows if a business is bringing in cash or losing cash over time. With cash being the lifeblood of business, knowing if cash is moving into the business or out of the business is critical.
You can use the cash flow statement to calculate cash runway – the amount of time that a business can stay in operation if it continues to lose money at its current pace. Learn more about cash runway.
How the cash flow statement works with the Income Statement and Balance Sheet
Along with the income statement and balance sheet, the cash flow statement is one of the three critical financial statements that you can use to evaluate a business’s performance.
The income statement records booked sales and expenses and calculate profits. It’s important to know if a business is profitable, but you then turn to the cash flow statement to see how this activity impacts cash.
The income statement does not reflect cash received and spent. This is because customers often take time to pay after they receive an invoice and businesses also don’t pay all their bills right away. Learn more about the difference between cash and profits.
The balance sheet connects to the cash flow statement in that it also records the amount of cash a business has on hand. In addition to this key metric, the balance sheet lists a business’s assets and liabilities. Learn more about how to read and understand a balance sheet.