Cash flow statement
See what a cash flow statement is, its 3 parts, and how to prepare and read one for your business.
Published Thursday 23 July 2026
Table of contents
Key takeaways
- A cash flow statement tracks the cash moving into and out of your business over a set period, so you can see if you have enough to cover costs.
- It splits activity into 3 parts: operating, investing and financing, giving you a clear picture of where your money comes from and goes.
- Profit and cash flow aren't the same, which is why a profitable business can still run short of cash.
- Reading it regularly helps you spot problems early and plan ahead with more confidence.
What is a cash flow statement?
A cash flow statement is a financial report that shows where a business's money is coming from and where it's going. It's also known as a statement of cash flows or a CFS.
It's one of the core reports you'll use to understand your finances, alongside your profit and loss statement and balance sheet. Where those reports capture profit and overall position, this one focuses purely on the cash that actually moves through your business.
What a cash flow statement shows and why it matters
A cash flow statement shows how much cash your business generated and spent over a period, and whether you ended up with more or less than you started with. It answers a simple but vital question: can you pay your bills?
Profit on paper doesn't always mean cash in the bank. You might have invoiced a large job, but if the customer hasn't paid yet, that money can't cover your rent or wages. Tracking your cash flow shows you the real, available position rather than the theoretical one.
It also helps you plan. When you can see the pattern of cash coming in and going out, you can time large purchases, manage seasonal dips and build a more accurate cash flow forecast for the months ahead.
The 3 parts of a cash flow statement
A cash flow statement organises your cash movements into 3 categories. Splitting them this way makes it easier to see whether your day-to-day trading, your asset decisions or your funding is driving the change in cash.
- Operating activities: the cash from your core business, such as money received from customers and cash paid out for stock, wages, rent and everyday running costs. This section tells you whether your normal trading generates enough cash to sustain itself.
- Investing activities: the cash tied to buying or selling longer-term assets, such as equipment, vehicles or property. Buying a new delivery van shows here as cash out; selling old machinery shows as cash in.
- Financing activities: the cash from funding your business, such as taking out a loan, repaying it, or an owner putting money in or drawing it out. This section shows how you're funding growth and returning value to owners.
Cash flow statement vs profit and loss statement and balance sheet
These 3 reports work together, but each answers a different question about your business. Knowing which one to reach for saves you time and confusion.
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Your profit and loss statement shows income and expenses over a period to reveal whether you made a profit or a loss. It includes non-cash items like depreciation and records income when it's earned, not necessarily when the cash arrives.
Your balance sheet is a snapshot at a single point in time, listing what you own, what you owe and the owner's equity. The cash flow statement bridges the two: it explains how the cash figure on your balance sheet changed over the period covered by your profit and loss statement.
How to prepare a cash flow statement
You can prepare a cash flow statement from records you already keep, working through the categories one at a time. The basic idea is simple: cash in, minus cash out, over your chosen period.
- Choose the period you want to report on, such as a month, quarter or financial year.
- Find your opening cash balance, the amount of cash you held at the start of that period.
- Work out the net cash from operating activities by totalling cash received from customers and subtracting cash paid for running costs.
- Work out the net cash from investing activities by adding cash from asset sales and subtracting cash spent on equipment or property.
- Work out the net cash from financing activities by adding funds received from loans or owners and subtracting repayments and drawings.
- Add the 3 net figures together to get your total change in cash for the period.
- Add that change to your opening balance to confirm your closing cash balance matches your bank records.
Direct vs indirect method
There are 2 ways to present the operating activities section, and both arrive at the same net cash figure. The difference is in how you get there.
The direct method lists actual cash receipts and payments, such as cash from customers and cash paid to suppliers. It's straightforward to read and shows exactly where cash came in and went out.
The indirect method starts with your net profit and adjusts it for non-cash items and changes in things like invoices owed to you. Many businesses use this method because it links neatly to the profit figure already in their accounts.
How to read a cash flow statement
Reading a cash flow statement is mostly about noticing whether cash is growing or shrinking, and understanding why. Start with the bottom line: did your total cash go up or down over the period?
Positive cash flow means more cash came in than went out, which gives you room to cover costs, repay debt or reinvest. Negative cash flow means the opposite, and while it isn't always a warning sign, it's worth understanding the cause.
Look at the operating section closely, since healthy businesses usually generate positive cash from trading. Negative operating cash flow over several periods, or a reliance on loans to stay afloat, is worth watching. Strong cash flow management starts with reading these signals early.
Cash flow statement example
A short example makes the structure easier to follow. Imagine a small Auckland café reporting on a single month, starting with $8,000 in the bank.
During the month, the café takes $22,000 in cash from customers and pays $16,000 for stock, wages and rent, giving net operating cash of $6,000. It buys a new coffee machine for $4,000, so investing activities show $4,000 out. The owner repays $1,000 of a business loan, so financing activities show $1,000 out.
Adding those together gives a net cash increase of $1,000, lifting the closing balance to $9,000. For a fuller breakdown you can follow, see this cash flow statement example.
Track your cash flow with Xero
A cash flow statement is far more useful when the numbers behind it are always up to date. When your bank transactions flow in automatically and reconcile as you go, you can see your real cash position whenever you need it, without digging through spreadsheets.
That visibility helps you make confident decisions about spending, saving and growth, and it turns your financial statements into something you actually use. Try Xero, keep an eye on your cash position and see where your money goes. Get one month free.
FAQs on cash flow statements
Here are some frequently asked questions about cash flow statements to clear up the points people ask about most.
What is the difference between cash flow and profit?
Profit is what's left after you subtract expenses from income, while cash flow is the actual money moving in and out of your accounts. You can be profitable on paper yet still be short of cash if customers haven't paid you yet.
Can a business be profitable but still run out of cash?
Yes, this happens when profit is tied up in unpaid invoices, stock or equipment rather than sitting in the bank. That's why tracking cash alongside profit matters.
What is the difference between a cash flow statement and a balance sheet?
A cash flow statement shows cash movements over a period, while a balance sheet is a snapshot of what you own and owe at a single point in time. The cash flow statement explains how the cash on your balance sheet changed.
How often should you prepare a cash flow statement?
Many small businesses prepare one monthly to stay on top of their position, though quarterly can work for steadier businesses. More frequent reporting helps you spot and fix problems sooner.
Related terms
Learn more about cash flow statements
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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.