Cash flow statements explained | Sage Advice US
A cash flow statement offers a definitive look at the financial health of a business, showing how well it’s performing during the current reporting period and over time.
These statements are vital to inform decision-making for leadership, investors, and creditors.
Understanding a cash flow statement is useful beyond the finance team too, as it can benefit potential employees evaluating a company or small businesses researching their market.
Cash is the lifeblood of a company, so your management team needs to monitor the cash flow at all times to support continuity and growth.
To get a head start, you can also download our cash flow template.
Key takeaways
- A cash flow statement shows how cash moves in and out of your business across three areas: operating, investing, and financing activities.
- It tells you whether your business has enough cash on hand to cover expenses and debts.
- Positive cash flow doesn’t always mean profit, and negative cash flow doesn’t always signal crisis—context matters.
- There are two ways to prepare a cash flow statement: the direct method and the indirect method.
- Reviewing cash flow statements alongside your income statement and balance sheet gives the most complete picture of financial health.
Here’s what we’ll cover
What is a cash flow statement?
A cash flow statement is a simple report that discloses your business’s cash outflows and inflows during a reporting period. It shows how the business received and spent cash, providing a complete picture of what occurred with the business’s cash during the time frame in question. It also confirms whether the organization can pay its expenses and debts.
Also known as a statement of cash flows, this document is part of a set of required primary statements, along with the balance sheet and income statement.
We’ll compare these three reports in depth below, but essentially:
- Cash flow statements show how much cash is in hand, and how the business uses its cash.
- Balance sheets show the business’s assets, liabilities, and equity.
- Income statements show the business’s profitability.
All cash flow statements use standardized formats and formulas.
US-based companies using GAAP (generally accepted accounting principles) follow ASC 230 (Accounting Standards Codification 230) as a guide for developing cash flow statements.
Organizations using IFRS (International Financial Reporting Standards) follow IAS 7 (International Accounting Standard 7: Statement of Cash Flows) when creating this report.
Although these two sets of guidelines are similar, they differ in how they classify various reporting activities. We’ll detail the differences below.
What is a cash flow statement used for?
A cash flow statement serves several purposes across a business, from informing internal financial decisions to giving investors, creditors, and other external stakeholders a basis for evaluating the company.
Internal and external decision makers use it in different ways:
- Creditors may use it to assess the organization’s liquidity (e.g. the amount of cash on hand).
- Investors may use it to measure the company’s financial health and inform their valuation.
- Shareholders may use it to monitor the strength of their investments over time.
- Accounting staff may use it to confirm whether the company can successfully process payroll.
- Potential employees may use it when interviewing to confirm the company can afford their salaries.
- Market research may use it to assess the state of the market and the performance of their direct or indirect competitors.
Because cash flow statements follow accounting standards, they can also be used as comparative tools.
In other words, you can use them to compare the performance and efficiency of two or more companies. You can also use them to compare a single company’s performance over multiple reporting periods.
Companies may produce cash flow statements monthly, quarterly, or annually. This is why accurate general ledger reconciliation is so important.
At the very least, the Securities and Exchange Commission (SEC) requires companies to include this statement in quarterly and annual reports.
Note that only publicly listed companies have to comply with SEC reporting requirements. Private companies are not required.
What does a cash flow statement show you about your business?
A cash flow statement shows you whether your business is generating enough cash to cover its expenses, repay debts, and fund growth, as well as where that cash is coming from and going.
Specifically, it can help you answer:
How liquid is your business?
This statement tells you exactly how much cash your business has on hand at the end of the reporting period. It confirms if you can pay debts and operating expenses in cash.
What are your biggest sources of cash inflow and outflow?
The simplicity of this report makes it easy to see which activities contribute most to your business’s income and expenses.
How is your cash flow likely to look in the future?
You can compare multiple consecutive statements to identify patterns, support cash flow forecasting, and make data-driven decisions about business plans.
Is your business likely to receive financing?
Investors and lenders often review cash flow to make decisions about providing loans, lines of credit, and funding.
What should a cash flow statement include?
A cash flow statement is structured around three sections: operating, investing, and financing activities. Each details a specific type of cash inflow or outflow, making it easy to see which has the biggest impact on the business’s cash flow.
Operating activities
Operating activities refer to standard business activities. This section of the statement shows how much cash the company’s offerings (e.g., products or services) generate.
Cash from operating activities includes:
- Selling goods or services.
- Paying suppliers and vendors.
- Making interest or income tax payments.
- Paying wages or salaries to employees.
- Making rent payments for company facilities.
Investing activities
Investing activities refer to investments the company has made using free cash rather than debt. This section of the statement shows how much cash the company generates from buying or selling investments or assets.
Cash flow from investing activities includes:
- Buying or selling assets (e.g., real estate and equipment).
- Issuing to and collecting loans from subsidiaries of the company.
- Purchasing marketable securities such as IP rights, or contracts.
- Engaging in mergers and acquisitions.
For investment companies, investing is part of doing business. In this case, any cash paid or owed for investments appears in the operating activities section.
Financing activities
Financing activities refer to investments other organizations have made in the company. This section of the cash flow statement shows how much cash the company generates from raising funds and repaying debt.
Cash flow from financing activities includes:
- Financing from loans or investors.
- Repaying debt principal.
- Making payments to shareholders.
- Issuing stock.
What are cash equivalents?
A cash flow statement includes both cash and cash equivalents. Cash equivalents are short-term investments that are highly liquid. To fit this definition, they must be easy to convert to cash or so close to maturity that the risk of valuation changes are low.
Some examples of cash equivalents include:
- Currency
- Bank accounts
- Treasury bills
- Short-term government bonds
Balances and disclosures
After listing the business’s activities, the statement shows the total increase or decrease in cash and cash equivalents.
A positive number reflects a net increase, while a negative number reflects a net decrease.
The statement also includes the opening balance of cash and cash equivalents for the reporting period.
This figure equals the closing cash balance for the previous period and can be placed either at the top of the statement or at the end with the closing balance.
At the end of the statement is the closing balance of cash and cash equivalents for the current reporting period.
This closing balance figure will become the opening balance for the subsequent reporting period.
Cash flow statements also disclose non-operating non-cash activities—for example, renegotiating debt as a debt/equity swap.
The accounting standard your organization uses determines where this disclosure appears: IFRS places non-operating non-cash investing activities in a footnote, while GAAP allows these disclosures to appear either on the statement or in a footnote.
Direct vs indirect cash flow method
There are two accepted methods for calculating cash flow from operating activities: the direct method and the indirect method. Both are permitted under GAAP and IFRS, though IFRS prefers the direct method.
What is the direct method?
The direct method calculates cash flow from operating activities by listing all cash receipts and payments directly, making it the more transparent and straightforward of the two approaches.
It’s optimal for businesses using the cash basis accounting method, especially those following IFRS.
This method is essentially a tally of cash collected minus cash disbursed. To use it, simply list out and add up all cash payments and receipts from the reporting period.
What is the indirect method?
The indirect method calculates cash flow from operating activities by starting with net income and adjusting for non-cash items, making it the more common choice for businesses using accrual basis accounting.
This is because the indirect method uses the company’s income statement as the starting point for calculating cash flow.
The income statement counts income and expenses when they’re accrued. To use this method, start with the net income. Then, adjust it by adding or subtracting all non-cash items.
Asset depreciation and amortization are some of the most common adjustments. Both of these items decrease income, but they aren’t cash expenses.
An April 2024 amendment to IFRS requires companies to begin using the operating profit subtotal as the starting point for the indirect method. This change affects annual periods starting on or after January 1, 2027.
How to read a cash flow statement
Reading a cash flow statement means looking beyond the headline positive or negative figure. The real insight comes from understanding what the numbers across all three sections (operating, investing, and financing) are telling you about the health and direction of your business.
A cash flow statement reflects your business’s cash position at a point in time.
Comparing statements across multiple reporting periods reveals whether the business is growing, stabilizing, or declining, and whether any concerning patterns are temporary or persistent.
What does negative cash flow mean?
Negative cash flow means the business is spending more cash than it’s receiving during the reporting period. This doesn’t always signal a serious problem.
A business undergoing rapid expansion may show negative cash flow while investing heavily in new equipment, premises, or headcount.
Early-stage startups often run negative cash flow for extended periods before reaching profitability.
Negative cash flow that is narrowing over time paints a very different picture from negative cash flow that is widening.
- Negative operating cash flow and significantly negative investing cash flow may indicate the business is funding growth.
- Persistently negative operating cash flow on its own suggests the core business is not generating enough cash to sustain itself.
What does positive cash flow mean?
Positive cash flow means the business is bringing in more cash than it’s paying out. However, positive cash flow can sometimes be driven by financing or investing activities rather than strong business performance.
This is one reason why cash flow and profit are not the same thing, and why both metrics should be reviewed together.
Examples include:
- Taking out a large loan.
- Selling off assets.
- Drawing on a line of credit.
These are financing or investing inflows, not cash generated by the business’s day-to-day operations.
The strongest signal is positive operating cash flow, because it reflects the underlying performance of the business.
Some fluctuation between reporting periods is normal. However, businesses with persistently uneven cash flow may appear unstable to investors and lenders.
Reading the three sections together
Looking at all three sections together provides the most useful insights.
- Strong operating cash flow, negative investing cash flow: the business is generating cash from operations and reinvesting it. This is generally a healthy sign of growth.
- Negative operating cash flow, positive financing cash flow: the business is relying on external funding to cover operational costs. This is common in early-stage businesses but unsustainable long-term.
- Positive cash flow across all three sections: the business is generating cash, raising funds, and selling assets or investments. Check whether asset sales are masking weaker operating performance.
- Negative cash flow across all three sections: the business is burning cash across every area. Over multiple reporting periods, this is a serious warning sign.
Using your cash flow statement for better decision-making
Reviewing your cash flow statement regularly, alongside your income statement and balance sheet, gives you a clearer picture of your financial position.
It can help you:
- Spot shortfalls before they become critical.
- Plan for seasonal dips in revenue.
- Time major purchases or investments.
- Build a credible case when approaching lenders or investors.
Identifying potential shortfalls early can help you address common cash flow problems before they affect day-to-day operations.
Cash flow statement vs. income statement vs. balance sheet
Cash flow statements, income statements, and balance sheets each provide a different view of a company’s financial health.
That’s why they’re often reviewed alongside each other. The table below provides a quick breakdown of what they do and how the differ.
| Financial statement | What it shows | Includes | Doesn’t include |
|---|---|---|---|
| Cash flow statement | Cash moving into and out of the business during a reporting period | Operating, investing, and financing cash activities | Credit sales and expenses that haven’t yet affected cash |
| Income statement (P&L) | Revenue, expenses, and profitability over a reporting period | Revenue, expenses, depreciation, and accrued income and costs | The business’s actual cash position |
| Balance sheet | What the business owns and owes at a specific point in time | Assets, liabilities, and equity | Revenue, expenses, and cash flow activity |
While these reports measure different aspects of financial performance, they work together to provide a more complete picture of a business’s financial health.
For example, a company may report a profit on its income statement while showing negative cash flow if customers haven’t yet paid outstanding invoices.
Likewise, the balance sheet provides context by showing the assets, liabilities, and equity that support the company’s financial position.
Reviewing all three statements together can help business owners, investors, lenders, and other stakeholders better understand a company’s performance, liquidity, and long-term stability.
Cash flow statement example
This example illustrates how a typical cash flow statement looks.
The example above shows three years of cash flow data for Best Firm LLC (2022–2024). Let’s go through each section of the statement together:
Operating activities
Best Firm LLC collected $380,000 from customers in 2024 and paid out $280,000 in wages, admin, interest, and taxes. After adjustments for depreciation and working capital changes, total operating cash flow was $110,000—up from $31,500 in 2022, a strong sign of improving operational health.
Investing activities
The business spent $65,000 in 2024 on property, equipment, and investments. This section has been consistently negative across all three years, reflecting ongoing reinvestment rather than asset sales.
Financing activities
In 2024, Best Firm LLC repaid $30,000 in bank loans and paid $5,000 in dividends, which means a net outflow of $35,000. In 2022, by contrast, the business raised $100,000 through new loans and stock issuance.
Cash at end of year
The closing balance was $41,000 in 2024, up from $31,000 in 2023. This figure becomes the opening balance for the next reporting period.
You can download a cash flow statement template here.
Simplify cash flow reporting and forecasting
Understanding your cash flow statement is only the first step.
To make informed decisions, businesses need accurate, up-to-date financial data and reporting tools that make trends easier to identify.
Sage Intacct includes more than 150 financial reports and customizable dashboards that help finance teams monitor cash flow, track performance, and access key financial information in real time.
With the right cash management and financial reporting software, you can improve your forecasting accuracy, strengthen financial planning, gain greater visibility into your true cash position, and make better business decisions.
Cash flow statement FAQs
GAAP (ASC 230) and IFRS (IAS 7) both require cash flow statements, but they differ in how certain cash flows are classified. IFRS generally allows more flexibility in the treatment of interest, dividends, and some bank overdrafts, while GAAP applies more prescriptive classification rules. Both frameworks allow businesses to use either the direct or indirect method.
Yes. A business can report a profit on its income statement while experiencing negative cash flow if, for example, customers have not yet paid invoices, the company has made significant inventory purchases, or it is investing heavily in growth.
Many businesses prepare cash flow statements monthly to monitor liquidity and support planning, while others prepare them quarterly or annually. The ideal frequency depends on the business’s size, cash flow complexity, and reporting requirements.
Cash flow and profit measure different things. Profit is the surplus left after expenses are deducted from revenue, and is recorded when income is earned or costs are incurred. Cash flow tracks the actual movement of money in and out of the business.
A business can be profitable on paper but still run into cash flow problems if customers are slow to pay or if significant cash has been spent on inventory or equipment. Reviewing both together gives a more complete picture of financial health.
Yes. Reviewing cash flow statements across multiple reporting periods helps businesses identify patterns, plan for seasonal dips in revenue, time major purchases, and spot potential shortfalls before they become critical. Lenders and investors also use cash flow statements when evaluating funding applications, so keeping them accurate and up to date strengthens your position in financing conversations.
This article was verified by a US-based Certified Public Accountant (CPA). Accounting rules are complex and change frequently and we recommend you seek any accounting advice from a qualified CPA.
Browse more topics from this article
Recommended
The essential SaaS business metrics every business should be tracking
From revenue and retention to acquisition and growth, tracking essential SaaS metrics is the key to driving business growth, improving decision-making, and staying ahead of the competition. Learn which metrics matter most—and how to track them effectively.
