Cash flow statement
Learn what a cash flow statement is, what it shows, and how to prepare and read one for your business.
Published Monday 17 August 2026
Table of contents
Key takeaways
- A cash flow statement tracks the actual cash moving in and out of your business over a period, showing whether you have enough cash to cover expenses and invest in growth.
- The statement is divided into three sections: operating activities, investing activities, and financing activities.
- Positive cash flow means more cash came in than went out, while negative cash flow isn't always bad if it results from planned investments in your business.
- Reviewing your cash flow statement regularly helps you spot problems early, plan ahead, and make confident financial decisions.
What is a cash flow statement?
A cash flow statement is a financial report that shows how cash moves in and out of your business over a specific period. It's also known as a statement of cash flows.
Unlike a profit and loss statement, which includes non-cash items like depreciation and accrued revenue, a cash flow statement focuses on actual cash. This makes it a practical tool for understanding your liquidity and whether you can pay bills, staff, and suppliers on time.
What does a cash flow statement show?
A cash flow statement gives you a clear view of your business's liquidity. It answers a simple question: do you have enough cash to keep operating?
Here's what a typical cash flow statement includes:
- Cash generated from or used in day-to-day operations
- Cash spent on long-term assets like equipment or property
- Cash received or paid out through loans, investments, or owner withdrawals
- Opening cash balance at the start of the period
- Net cash movement during the period
- Closing cash balance at the end of the period
Cash flow vs profit
Profit and cash flow are not the same thing. A business can show a profit on paper but still run out of cash if customers take too long to pay.
Profit is calculated using accrual accounting, which records revenue when it's earned and expenses when they're incurred. Cash flow, on the other hand, only counts money when it actually enters or leaves your bank account. This is why a profitable business can still struggle to pay suppliers or staff if cash isn't arriving quickly enough.
Who uses a cash flow statement?
Several groups rely on cash flow statements to assess a business's financial health. Each has different reasons for reviewing this report.
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- Business owners and managers use it to monitor liquidity, plan spending, and make informed decisions about operations
- Investors and lenders review it to evaluate whether a business can repay loans or generate returns
- Accountants and bookkeepers use it to prepare accurate financial reports and advise clients
The 3 parts of a cash flow statement
A cash flow statement is divided into three sections. Each one tracks a different type of cash activity in your business.
Operating activities
This section covers cash generated or spent through your core business activities. For most businesses, this is the most important part of the statement.
- Cash received from customers
- Payments to suppliers for goods and services
- Wages and salaries paid to employees
- Tax payments, including VAT
- Rent, utilities, and other operating expenses
Investing activities
This section records cash used to buy or sell long-term assets. These are items your business uses over several years rather than consuming immediately.
- Purchase of equipment, machinery, or vehicles
- Proceeds from selling fixed assets
- Investments in other businesses or securities
Financing activities
This section tracks cash flows related to funding your business. It includes money raised from investors or lenders and cash paid back to them.
- Proceeds from bank loans or credit facilities
- Loan repayments
- Owner investments or drawings
- Dividend payments to shareholders
Direct method vs indirect method
There are two ways to prepare the operating activities section of a cash flow statement: the direct method and the indirect method.
The direct method lists actual cash receipts and payments. For example, it shows cash received from customers and cash paid to suppliers as separate line items. This gives a clear picture of where cash came from and where it went.
The indirect method starts with net profit and adjusts for non-cash items and changes in working capital. It's often easier to prepare because it uses figures already available in your accounting records.
In the Philippines, both methods are permitted under PAS 7 (Philippine Accounting Standard 7, Statement of Cash Flows), the local adoption of the international IAS 7 standard. PAS 7 encourages the direct method, but many businesses use the indirect method because it's simpler to prepare from existing records.
How to prepare a cash flow statement
Preparing a cash flow statement doesn't have to be complicated. Follow these steps to create one for your business.
- Gather your financial records, including bank statements, invoices, and receipts. Make sure you record your transactions accurately throughout the period.
- Note your opening cash balance at the start of the period.
- List all cash inflows and outflows from operating activities, including payments from customers, supplier payments, wages, and taxes.
- Add cash flows from investing activities (asset purchases or sales) and financing activities (loans, repayments, owner contributions).
- Calculate the net cash movement by adding all inflows and subtracting all outflows. Add this to your opening balance to get your closing cash balance.
How to read a cash flow statement
Once you have a cash flow statement, knowing how to interpret it helps you make better decisions. Here's what to look for.
- Start with operating cash flow: positive operating cash flow suggests your core business is generating enough cash to sustain itself
- Compare across periods to spot trends in how your cash position is changing over time
- Look at investing activities to understand whether the business is growing, maintaining, or scaling back its asset base
- Review financing activities to see if the business is taking on more debt, paying it down, or distributing profits to owners
Watch for these warning signs that may signal cash flow problems:
- Consistently negative operating cash flow despite showing a profit
- Heavy reliance on financing activities to cover operating expenses
- A declining closing cash balance over several periods
- Large gaps between revenue reported and cash actually collected
Positive vs negative cash flow
Understanding the difference between positive and negative cash flow helps you assess your business's financial position at any point in time.
Positive cash flow
Positive cash flow means more cash came into your business than went out during the period. This is generally a good sign, as it means you can pay your bills, build reserves, and invest in growth opportunities.
Sustained positive cash flow from operations gives you flexibility. You're not dependent on loans or outside investment to keep the business running.
Negative cash flow
Negative cash flow means you spent more cash than you received. While this sounds alarming, it's not always bad.
Planned investments, such as purchasing equipment or opening a new location, often cause short-term negative cash flow. The key is ensuring you have enough reserves or financing to cover these periods. Unexpected or prolonged negative cash flow, especially from operating activities, is a warning sign that needs attention.
Cash flow statement vs income statement vs balance sheet
A cash flow statement is one of three core financial statements every business should understand. Each serves a different purpose.
- A cash flow statement tracks actual cash movements over a period, showing liquidity and how cash was generated and spent
- An income statement (also called a profit and loss statement) shows revenue, expenses, and profit over a period, using accrual accounting that includes non-cash items
- A balance sheet provides a snapshot of assets, liabilities, and equity at a single point in time
Together, these three statements give you a complete picture of your business's financial health.
Cash flow statement example
Here's a simplified cash flow statement for Mariposa Creative Studio, a graphic design business in the Philippines, for the quarter ending 31 March 2026. All figures are in Philippine pesos.
Operating activities:
- Cash received from clients: +₱450,000
- Payments to suppliers: -₱80,000
- Staff wages: -₱180,000
- VAT payment: -₱32,000
- Office rent: -₱45,000
- Net cash from operating activities: +₱113,000
Investing activities:
- Purchase of new computer equipment: -₱35,000
- Net cash from investing activities: -₱35,000
Financing activities:
- Loan repayment: -₱20,000
- Net cash from financing activities: -₱20,000
Summary:
- Opening cash balance: ₱120,000
- Net cash movement: +₱58,000
- Closing cash balance: ₱178,000
This example shows Mariposa Creative Studio generated positive operating cash flow of ₱113,000. After investing in new equipment and repaying part of a loan, the business still increased its cash position by ₱58,000. The closing balance of ₱178,000 provides a healthy buffer for future expenses.
Why cash flow statements matter for your business
For many Philippine small businesses, the gap between issuing an invoice and actually getting paid is the biggest strain on cash. Without visibility into cash flow, you might think you're profitable while struggling to cover payroll or supplier bills.
Reviewing your cash flow statement regularly helps you:
- Spot potential cash shortfalls before they become emergencies
- Plan for seasonal fluctuations and slow periods
- Make informed decisions about hiring, purchasing, or expanding
- Prepare accurate filings for the Bureau of Internal Revenue (BIR) and the Securities and Exchange Commission (SEC)
- Build a reliable cash flow forecast to plan ahead
By managing your cash flow proactively, you're better prepared to handle unexpected expenses and take advantage of growth opportunities when they arise.
Take control of your cash flow with Xero
Good cash flow management starts with accurate, up-to-date financial records. Xero's accounting software makes it easy to run your financial reports, including cash flow statements, so you always know where you stand. With automated bank feeds and simple reconciliation, you'll spend less time on bookkeeping and more time running your business. Get one month free and see how Xero can help you stay on top of your cash flow.
FAQs on cash flow statements
Here are answers to common questions Philippine business owners have about cash flow statements.
Do Philippine businesses need to produce a cash flow statement?
Under PAS 7 and PFRS for SMEs, the statement of cash flows is a required part of a complete set of financial statements. There is no small-company exemption in the Philippines, so all businesses preparing full financial statements must include one.
How often should you review your cash flow statement?
Monthly reviews give you the best visibility into your cash position. This allows you to spot trends early and respond before small issues become bigger problems.
What's the difference between cash flow and profit?
Profit is calculated using accrual accounting and includes non-cash items. Cash flow only counts actual cash received and paid out, so a profitable business can still have cash flow problems if customers pay late.
Can a business survive with negative cash flow?
Yes, but only in the short term. Planned negative cash flow from investments is normal, but prolonged negative operating cash flow requires either reserves or external funding to avoid running out of cash.
What's the easiest way to track cash flow?
Using accounting software that automates bank feeds and generates cash flow reports saves time and reduces errors. This gives you an accurate, real-time view of your cash position without manual calculations.
Related terms
Learn more about cash flow statements
Handy resources
Advisor directory
You can search for experts in our advisor directory
How to manage your finances and cash flow
Learn about money management for your small business
Financial reporting
Keep track of your performance with accounting reports
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.