Cash flow statement

Published Wednesday 17 June 2026

Table of contents

• What is a cash flow statement?
• Why cash flow statements matter
• Parts of a cash flow statement
• How to prepare a cash flow statement
• Direct vs indirect method
• Cash flow statement example
• Cash flow statement vs other financial statements
• How to use a cash flow statement for your business
• Manage your cash flow with Xero
• FAQs on cash flow statements

Key takeaways

• A cash flow statement tracks money flowing in and out of your business over a set period, covering operating, investing and financing activities.
• Unlike your profit and loss statement, a cash flow statement shows your actual cash position, helping you spot shortfalls before they become a problem.
• Preparing a cash flow statement involves gathering your financial records, categorising transactions into 3 activity types and calculating your net cash movement.
• Regularly reviewing your cash flow statement helps you make smarter decisions about spending, borrowing and planning for growth.

What is a cash flow statement?

A cash flow statement is 1 of the 3 core financial statements every business needs. It gives you a clear picture of how cash moves through your business over a specific period.

Also known as a statement of cash flows (CFS), this report tracks all the cash coming into your business and all the cash going out. It covers everything from customer payments and supplier costs to loan repayments and equipment purchases. You can see how one looks in practice with a cash flow statement example.

The cash flow statement sits alongside your profit and loss statement and balance sheet to give a complete view of your financial health. While your profit and loss statement shows revenue and expenses on an accrual basis, the cash flow statement focuses purely on actual cash transactions.

In Australia, cash flow statements are prepared in line with AASB 107 (Statement of Cash Flows), which sets out how businesses should classify and report their cash movements. Even if you're not required to prepare one for compliance, it's a valuable tool for understanding your business finances.

Why cash flow statements matter

Knowing your cash position is essential for running a healthy business. A cash flow statement helps you see whether you can comfortably cover day-to-day expenses like supplier bills and employee wages.

Cash flow timing is a real challenge for Australian small businesses. Xero Small Business Insights data shows Australian small businesses waited an average of 23.9 days to be paid in the December quarter of 2025, and invoices were paid an average of 6.6 days late. Delays like these put direct pressure on your operating cash flow, which is why tracking it regularly matters.

A cash flow statement also helps you identify how much your business relies on borrowing to stay afloat. If most of your incoming cash is from loans rather than sales, that's a signal to review your business model.

A cash flow statement helps you:

• assess whether you have enough cash to pay bills, wages and other obligations on time
• spot cash flow problems early, before they turn into a crisis
• set realistic budgets based on actual cash movements
• make informed decisions about when to invest, hire or expand
• show investors and lenders that your business generates real cash, not just paper profits

Parts of a cash flow statement

A cash flow statement is divided into 3 main sections, each covering a different type of cash activity. Together, they show you the full picture of where your money is coming from and where it's going.

Cash flow from operating activities

Operating activities cover the cash generated and spent through your core business operations. This is the section that shows whether your day-to-day business is actually producing cash.

Cash inflows from operations include:

• payments received from customers for goods or services
• interest received on bank accounts
• tax refunds

Cash outflows from operations include:

• payments to suppliers and vendors
• employee wages and salaries
• rent and utility payments
• tax payments

You want most of your cash to come from operations. A business that consistently generates positive operating cash flow is in a strong position to cover its costs and invest in growth.

Cash flow from investing activities

Investing activities relate to cash spent on or received from buying and selling long-term assets. These are typically larger, less frequent transactions.

Common examples include:

• purchasing equipment, vehicles or property
• selling a business asset
• buying or selling investments

Negative cash flow from investing activities isn't necessarily a bad thing. It often means you're spending money to grow your business, which can pay off over time.

Cash flow from financing activities

Financing activities cover cash flowing between your business and its owners, investors or lenders. This section shows how your business funds itself beyond day-to-day operations.

Examples include:

• taking out a business loan
• repaying loan principal
• owner contributions or drawings
• issuing or buying back shares

According to Xero Small Business Insights, Australian small business sales grew 6.7% year-on-year in the December quarter of 2025. Stronger sales revenue flowing through operations can reduce your reliance on financing activities to keep the business running.

How to prepare a cash flow statement

Preparing a cash flow statement doesn't have to be complicated, especially if you keep your records up to date. Follow these steps to create one for your small business.

1. Choose your reporting period. Decide whether you're preparing a monthly, quarterly or annual cash flow statement. Monthly statements give you the most timely view of cash movements.
2. Gather your financial records. Pull together your bank statements, invoices, receipts, loan documents and any other records of cash transactions for the period.
3. Record your opening cash balance. Note how much cash your business had at the start of the period. You can find this on your bank statements or balance sheet.
4. List all cash inflows. Go through your records and note every instance of cash coming into the business, including customer payments, interest earned, asset sales and loan proceeds.
5. List all cash outflows. Record every payment made, including supplier payments, wages, rent, loan repayments, tax payments and asset purchases.
6. Categorise each transaction. Sort every inflow and outflow into 1 of the 3 categories: operating, investing or financing activities.
7. Calculate net cash flow for each category. Subtract total outflows from total inflows within each category to find the net cash flow from operating, investing and financing activities.
8. Calculate your overall net cash movement. Add together the net cash flow from all 3 categories. This tells you whether your total cash increased or decreased over the period.
9. Determine your closing cash balance. Add your net cash movement to your opening cash balance. This figure should match the cash balance on your bank statement at the end of the period.

If your closing balance doesn't match your bank records, go back through your transactions and check for anything you may have missed or miscategorised.

Direct vs indirect method

There are 2 approaches to preparing a cash flow statement: the direct method and the indirect method. Both produce the same bottom-line figure, but they differ in how they present operating activities.

The direct method lists actual cash receipts and payments from operating activities. For example, it shows exactly how much cash you received from customers and how much you paid to suppliers. This makes it straightforward and easy to understand.

The indirect method starts with your net profit from the profit and loss statement, then adjusts for non-cash items like depreciation and changes in working capital. It works backwards from profit to arrive at cash from operations.

In Australia, the indirect method is more commonly used, particularly for general-purpose financial reporting. It's often simpler to prepare because it draws directly from your existing profit and loss and balance sheet data. However, the direct method can be more useful for day-to-day cash management because it shows actual cash movements.

Regardless of which method you use, the investing and financing sections of the cash flow statement remain the same.

Cash flow statement example

This quarterly cash flow statement example shows how the 3 sections work together for a small business. You can also download a cash flow forecast template to plan ahead. The example uses the direct method for clarity.

Cash flow from operating activities:

• Cash received from customers: $85,000
• Cash paid to suppliers: -$35,000
• Cash paid for wages: -$22,000
• Cash paid for rent and utilities: -$6,000
• Tax paid: -$4,000
• Net cash from operating activities: $18,000

Cash flow from investing activities:

• Purchase of new equipment: -$8,000
• Net cash from investing activities: -$8,000

Cash flow from financing activities:

• Loan repayment: -$3,000
• Owner drawings: -$5,000
• Net cash from financing activities: -$8,000

Summary:

• Net cash movement for the quarter: $2,000
• Opening cash balance: $12,000
• Closing cash balance: $14,000

In this example, the business generated $18,000 from its core operations, which is a healthy sign. The investments and financing outflows totalled $16,000, leaving a positive net cash movement of $2,000. The closing cash balance of $14,000 confirms the business has more cash on hand than it started with.

Cash flow statement vs other financial statements

Your cash flow statement works alongside your profit and loss statement and balance sheet. Each report tells a different part of your financial story, and you need all 3 for a complete picture.

A profit and loss statement (also called an income statement) shows your revenue and expenses over a period. It tells you whether your business made a profit or a loss. However, it uses accrual accounting, which means it records income when it's earned and expenses when they're incurred, regardless of when cash actually changes hands.

A balance sheet shows what your business owns (assets), what it owes (liabilities) and what's left over (equity) at a single point in time. It's a snapshot of your financial position on a specific date.

The cash flow statement bridges the gap between these 2 reports. It explains why your cash balance changed between the start and end of a period, even when your profit and loss might suggest things are going well.

For example, your profit and loss might show a strong profit for the quarter. But if your customers are slow to pay their invoices, your cash flow statement will reveal that you don't yet have that money in the bank. Understanding this distinction helps you avoid making spending decisions based on profit alone.

How to use a cash flow statement for your business

Once you've prepared your cash flow statement, the real value comes from using it to guide your business decisions. Your cash flow statement is most useful when you act on what it tells you.

Positive cash flow means more cash is coming in than going out over a given period. This is generally a good sign, but it's worth looking at where the cash is coming from. Positive cash flow driven by strong operating activities is more sustainable than cash coming in from a one-off asset sale or a new loan.

Negative cash flow means more cash is going out than coming in. This isn't always cause for alarm. A business investing heavily in new equipment or stock might show negative cash flow in the short term, with the expectation of stronger returns later. Consistent negative cash flow from operations, however, is a red flag that needs attention.

A cash flow forecast takes your historical cash flow data and uses it to predict future cash movements. By looking at trends in your cash flow statements over several months or quarters, you can:

• anticipate periods where cash might be tight
• plan the timing of large purchases or investments
• decide when to chase outstanding invoices more aggressively
• prepare for seasonal fluctuations in revenue

Reviewing your cash flow statement alongside your profit and loss and balance sheet gives you the clearest view of your business's financial health. Make it a habit to check these reports at least monthly, so you can spot trends and act on them before small issues become bigger problems.

Manage your cash flow with Xero

Keeping track of your cash flow doesn't have to mean hours spent in spreadsheets. Xero's cloud accounting software helps give you real-time visibility into your cash position, so you can better understand where your business stands.

With Xero, you can automate bank reconciliation, send invoices and payment reminders, and run cash flow reports in just a few clicks. Short-term cash flow projections help you see what's coming up, so you can plan ahead with confidence. Get one month free.

FAQs on cash flow statements

These FAQs cover the questions small business owners ask most about cash flow statements.

What is the difference between a cash flow statement and a balance sheet?

A cash flow statement tracks cash movements over a period of time, while a balance sheet provides a snapshot of your assets, liabilities and equity at a single point. The cash flow statement explains how your cash balance changed between 2 balance sheet dates.

What is the purpose of a cash flow statement?

A cash flow statement shows you exactly how much cash your business generated and spent during a specific period. It helps you assess liquidity, plan for upcoming expenses and identify potential cash shortfalls before they happen.

What is the difference between cash flow and profit?

Profit is calculated using accrual accounting, which records income when it's earned, even if you haven't been paid yet. Cash flow reflects actual money moving in and out of your bank account, giving you a more immediate view of your financial position.

How do you prepare a simple cash flow statement?

Start by recording your opening cash balance, then list all cash received and all cash paid during the period. Categorise each transaction as operating, investing or financing, calculate your net cash movement, and add it to your opening balance to find your closing cash balance.

What does negative cash flow mean?

Negative cash flow means more money left your business than came in during the period. It can be temporary after a large purchase, but ongoing negative cash flow from operations is a signal that daily costs are outpacing what you earn from customers.