Cash flow statement
A cash flow statement tracks the real movement of money in and out of your business.
Published Thursday 6 August 2026
Table of contents
Key takeaways
- A cash flow statement tracks the actual movement of money into and out of your business over a specific period, showing whether you have enough cash to pay your bills.
- The statement is divided into three sections: operating activities, investing activities and financing activities.
- Cash flow differs from profit because it records real cash movements rather than accounting entries such as depreciation or accrued income.
- Reviewing your cash flow statement regularly helps you spot potential shortfalls early and plan ahead with confidence.
What is a cash flow statement?
A cash flow statement is a financial report that shows how cash moves into and out of your business during a specific period. Also called a statement of cash flows, it tells you whether your business generated or used cash, regardless of the profit you recorded.
This makes it different from a profit and loss statement. Your profit and loss statement includes non-cash items such as depreciation, accrued income and prepaid expenses. A sale recorded on credit, for example, appears as revenue on your profit and loss statement even though the money has not reached your bank account. The cash flow statement only counts cash when it actually arrives or leaves. Understanding the difference between cash and accrual accounting helps you interpret both reports accurately.
What does a cash flow statement show?
A cash flow statement gives you a clear view of your liquidity, showing whether your business has enough cash to cover day-to-day operations and upcoming obligations. It answers one simple question: where did the cash come from and where did it go?
A well-prepared cash flow statement reveals several useful insights.
- How much cash your core business activities generate
- Whether you are collecting payments from customers quickly enough
- How much you spent on equipment, property or other investments
- How you funded the business, including loans and repayments
- Your opening and closing cash balances for the period
Who uses a cash flow statement?
Several groups rely on cash flow statements to make informed decisions. In Hong Kong, understanding cash flow is particularly important for small businesses that need to stay on top of supplier payments and meet their profits tax obligations to the Inland Revenue Department (IRD).
Here are the main users of cash flow statements.
- Business owners and managers use the statement to check whether there is enough cash to pay wages, rent and suppliers on time.
- Investors and lenders review cash flow to assess whether a business can repay debt and fund growth without relying on external financing.
- Accountants and bookkeepers prepare and analyse the statement to advise clients on improving cash management.
If you are just getting started, a guide to small business accounting can help you set up the right processes from day one.
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The 3 parts of a cash flow statement
Every cash flow statement is organised into three sections that group cash movements by type. Each section answers a different question about how your business uses cash.
Operating activities
This section covers cash flows from your core business operations. It includes cash received from customers, payments made to suppliers and employees, rent, utilities, and taxes such as provisional profits tax payments to the IRD. A healthy operating cash flow means your day-to-day activities generate enough cash to sustain the business.
Investing activities
Investing activities record cash spent on or received from long-term assets. Buying equipment, vehicles or property counts as a cash outflow, while selling those assets produces a cash inflow. This section shows whether you are investing in growth or selling off assets to raise cash.
Financing activities
Financing activities capture cash movements related to how your business is funded. Loans received appear as cash inflows; loan repayments, dividend payments and owner drawings appear as cash outflows. This section helps you see how debt and equity financing affect your cash position.
What is free cash flow?
Free cash flow is the cash left over after your business covers its operating expenses and capital spending. You can calculate it by taking your operating cash flow and subtracting the money spent on capital items such as equipment, vehicles or property.
Investors watch free cash flow closely because it shows how much cash a business could use to pay dividends, reduce debt or invest in new opportunities without borrowing more. A consistently positive free cash flow suggests the business is financially healthy and self-sustaining.
Direct method vs indirect method
There are two ways to prepare the operating activities section of a cash flow statement. In Hong Kong, cash flow statements are prepared under Hong Kong Accounting Standard 7 (HKAS 7), issued by the Hong Kong Institute of Certified Public Accountants (HKICPA). Both methods arrive at the same net operating cash flow figure, but they take different routes to get there.
The direct method lists actual cash receipts and payments, such as cash received from customers and cash paid to suppliers. It gives a straightforward view of where cash came from and where it went.
The indirect method starts from net profit and adjusts for non-cash items (such as depreciation) and changes in working capital (such as increases or decreases in accounts receivable and accounts payable). Most businesses use the indirect method because the information is easier to pull from existing accounting records.
Positive vs negative cash flow
The cash flow statement ends with a net figure that is either positive or negative. Both outcomes carry different implications for your business.
Positive cash flow
Positive cash flow means more cash came into the business than went out during the period. This gives you the flexibility to pay bills on time, reinvest in growth, build a cash reserve or reduce debt. A sustained positive cash flow is a sign that your business model is working.
Negative cash flow
Negative cash flow means you spent more cash than you received. This is not always a bad sign. Growing businesses often experience negative cash flow when they invest heavily in equipment, inventory or new hires. However, ongoing negative cash flow can strain your ability to meet obligations and may signal deeper problems.
How to read a cash flow statement
Start with the operating activities section, because this shows whether your core business generates enough cash to keep running without outside help. If operating cash flow is consistently negative, the business may be relying on loans or asset sales to survive.
Here are some practical steps to follow when reviewing a cash flow statement.
- Compare operating cash flow to net profit to see how much profit converts to actual cash.
- Look at investing outflows to understand how much the business is spending on growth.
- Check financing activities for signs of increasing debt or regular loan repayments.
- Track the opening and closing cash balances over several periods to spot trends.
Keep an eye out for warning signs that may indicate cash flow trouble.
- Operating cash flow that is consistently lower than net profit
- Rising accounts receivable with slow customer payments
- Heavy reliance on new borrowing to fund day-to-day operations
- Declining cash balances period after period
Cash flow statement vs income statement vs balance sheet
Each of the three main financial statements answers a different question about your business. Together, they give you a complete picture of financial health.
- The cash flow statement shows how cash moved into and out of your business during a period.
- The income statement (profit and loss statement) shows revenue, expenses and profit or loss over the same period, including non-cash items.
- The balance sheet shows what you own (assets), what you owe (liabilities) and the value of the owner's stake (equity) at a single point in time.
Looking at all three together helps you understand not just whether the business made a profit, but also whether that profit translated into actual cash and how your overall financial position changed.
Cash flow statement example
The example below shows a quarterly cash flow statement for a fictional Hong Kong small business, a graphic design studio, for the quarter ending 31 March 2026. All figures are in HK$.
Operating activities
- Cash received from clients: +HK$450,000
- Payments to suppliers: −HK$80,000
- Staff wages: −HK$180,000
- Provisional profits tax payment: −HK$32,000
- Office rent: −HK$45,000
Net cash from operating activities: +HK$113,000
Investing activities
- Purchase of new computer equipment: −HK$35,000
Net cash used in investing activities: −HK$35,000
Financing activities
- Loan repayment: −HK$20,000
Net cash used in financing activities: −HK$20,000
Opening cash balance: HK$120,000
Net cash movement for the quarter: +HK$58,000
Closing cash balance: HK$178,000
This statement shows the studio generated HK$113,000 from its core design work, spent HK$35,000 upgrading equipment and repaid HK$20,000 of a loan. The closing balance of HK$178,000 confirms that the business ended the quarter with a stronger cash position than it started.
How to forecast cash flow
A cash flow statement looks backwards, showing what happened during a past period. A cash flow forecast looks ahead, helping you predict whether you will have enough cash to meet future obligations. If you want more detail on projecting your finances, a guide to cash flow forecasting covers the process in depth.
Follow these four steps to create a basic cash flow forecast.
- Choose a period, such as the next month, quarter or year.
- Estimate your cash inflows, including expected customer payments and any other income.
- List your cash outflows, covering supplier payments, wages, rent, loan repayments and taxes.
- Calculate net cash flow and your projected closing balance for each period.
Why cash flow statements matter for your business
Late customer payments are one of the most common causes of cash flow pressure for small businesses. Even a profitable business can run into trouble if cash is tied up in unpaid invoices while bills keep falling due. Keeping accurate financial records also makes it easier to prepare your annual profits tax return for the IRD and respond to any queries.
A regular review of your cash flow statement delivers several benefits.
- Spots potential shortfalls before they become emergencies
- Helps you time major purchases or investments wisely
- Strengthens your position when applying for loans or credit
- Supports better budgeting and financial planning
- Keeps your records accurate for tax reporting purposes
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FAQs on cash flow statements
Here are answers to common questions about cash flow statements in Hong Kong.
Do small businesses in Hong Kong need to produce a cash flow statement?
There is no legal requirement for most small private companies in Hong Kong to prepare a cash flow statement. However, producing one is strongly recommended because it gives you essential insight into your liquidity and helps you plan ahead.
Why is cash flow especially important for small businesses?
Small businesses often have limited cash reserves, so a short delay in customer payments can quickly create pressure on wages and supplier bills. Monitoring cash flow helps you act before a temporary gap becomes a serious problem.
How often should you review your cash flow statement?
Reviewing monthly is a good practice for most small businesses. If your cash position is tight or your income is seasonal, weekly reviews can help you respond faster to changes.
What's the difference between cash flow and profit?
Profit is an accounting measure that includes non-cash items such as depreciation and accrued income. Cash flow tracks actual money in and out, so a profitable business can still run short of cash if customers pay slowly.
Can a business survive with negative cash flow?
Yes, for a limited time. Businesses often experience negative cash flow during expansion or seasonal downturns. However, ongoing negative cash flow without a clear recovery plan can lead to insolvency.
What's the easiest way to track cash flow?
Using accounting software that automatically imports bank transactions and categorises them makes cash flow tracking far simpler than manual spreadsheets. Real-time dashboards let you check your cash position at any moment.
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.