What is a cash flow statement?
Learn what a cash flow statement is, its three parts, and how to read one to keep your business on track.
Published Thursday 23 July 2026
Table of contents
Key takeaways
- A cash flow statement shows where your business's money comes from and where it goes over a set period.
- It splits cash movement into three parts: operating, investing, and financing activities.
- You can build the operating section using the direct method or the indirect method.
- Negative cash flow isn't always bad, and steady positive cash flow from operations is a healthy sign.
Cash flow statement (definition)
A cash flow statement is a financial report that shows where your business's money is coming from and where it's going. It's also known as a statement of cash flows or a CFS.
The report tracks the cash that flows in and out of your business during a set period. It also tells you whether cash is leaving faster than it arrives, and whether you can cover your cash flow commitments as they fall due.
The 3 parts of a cash flow statement
A cash flow statement is divided into three main parts, and each one shows a different way cash moves through your business.
- Cash flow from operations: cash from sales and cash spent running the day-to-day business
- Cash flow from investing: cash spent and received when buying or selling large items like property and equipment
- Cash flow from financing: cash received from or paid back to lenders and investors, plus money the owner puts in or takes out
To see how these parts fit together on a real report, look at this example of a cash flow statement, or start your own with a cash flow statement template.
How to read a cash flow statement: direct vs indirect method
The operating section can be built in two ways, and knowing which method you're reading helps you understand the numbers. Both arrive at the same operating cash flow figure.
The indirect method starts from net income and adjusts for non-cash items like depreciation, then for changes in working capital such as receivables, payables, and inventory. It's the more common approach because it links neatly to your income statement.
The direct method lists actual cash receipts and payments, like cash collected from customers and cash paid to suppliers and staff. It gives a clearer picture of where the cash physically moved.
Positive vs negative cash flow
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Cash flow can be positive or negative in any given period, and the difference tells you how cash behaved. Positive cash flow means more cash came in than went out; negative cash flow means the opposite.
Negative cash flow isn't always a bad sign. A business investing in growth, such as buying equipment or opening a new location, can show negative cash flow while building for the future. What matters is understanding why the number moved and whether it fits your plans.
Cash flow statement vs income statement and balance sheet
The cash flow statement is one of three core financial statements, and each answers a different question about your business.
- The cash flow statement tracks the actual cash moving in and out over a period
- The income statement shows profit by setting revenue against expenses over the same period
- The balance sheet gives a snapshot of your assets, liabilities, and equity at a single point in time
Read together, they show whether your business is profitable, what you own and owe, and whether you have the cash to keep running.
Why cash flow statements matter
A cash flow statement gives you a clear view of your financial health so you can act with confidence. It helps in a few practical ways.
- Shows how well you can cover expenses like bills and employee wages
- Flags how much you rely on lending to keep going
- Helps you set budgets and plan ahead
- Gives investors a clear signal of how well your business brings in cash
Reviewing it regularly is a simple habit for managing cash flow and spotting problems early.
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FAQs on cash flow statements
Here are answers to some frequently asked questions about cash flow statements.
What is the difference between cash flow and profit?
Profit is what's left after you subtract expenses from revenue, while cash flow is the actual money moving in and out of your business. A business can show a profit and still be short on cash if payments haven't arrived yet.
What is the difference between the direct and indirect method?
The direct method lists actual cash receipts and payments, while the indirect method starts from net income and adjusts for non-cash items and working capital changes. Both give the same operating cash flow figure.
Can a profitable business run out of cash?
Yes, a profitable business can run out of cash if money is tied up in unpaid invoices or stock. That's why the cash flow statement matters alongside the income statement.
What is the difference between positive and negative cash flow?
Positive cash flow means more cash came in than went out over the period, and negative cash flow means more went out than came in. Negative cash flow can still be healthy when you're investing in growth.
Related terms
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.