What is a cash flow statement?

Cash flow statements provide visibility of upcoming costs and regular outgoings so you can understand the financial health of your business.

Cash flow statement (definition)

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.

A cash flow statement shows which parts of the business generated cash and which parts spent cash during a given period of time. It helps show if a business has any trouble meeting its expenses.

  • What it tracks: Cash in and out of the business
  • What it tells you: Whether cash is going out faster than it comes in and whether the business can pay its expenses

Parts of a cash flow statement

A cash flow statement is divided into three main parts:

  1. Cash flow from operations - cash from sales and cash spent running the business
  2. Cash flow from investments - cash spent and received from buying and selling large items like property and machinery
  3. Cash flow from financing - cash received from or paid back to lenders and investors, and cash put in or taken out by the owner

Ultimately, you want most of your cash to come from operations. It’s not sustainable for a business to keep getting its cash from selling assets or taking loans.

Why cash flow statements matter

A cash flow statement helps show how well you can cover expenses like bills and employee wages. It also helps flag how much you rely on lending to get by. These reports can help you set budgets and troubleshoot cash flow problems. They are also useful for potential investors, because they indicate how well your business can bring in money.

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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.