Cash flow statement: Definition and how it helps you make better business decisions
Track where your cash comes from and goes, so you can plan spending, cover costs and grow with confidence.
Written by Ebony-Storm Halladay — Freelance accounting copywriter, 10 years. Read Ebony's full bio
Published Thursday 2 July 2026
Table of contents
Key takeaways
- A cash flow statement tracks real money moving in and out of your business across three categories: operating activities, investing activities, and financing activities.
- Unlike a profit and loss statement, a cash flow statement shows your actual cash position, helping you plan payments, manage stock, and make confident spending decisions.
- You can prepare a cash flow statement using the direct or indirect method, and modern accounting software can generate one automatically from your existing records.
- Reviewing your cash flow statement regularly, alongside a short-term forecast, helps you spot potential shortfalls before they become problems.
What is a cash flow statement?
A cash flow statement is a financial report that tracks the actual cash moving in and out of a business over a set period. It shows where cash comes from and where it goes across three categories: operating activities, investing activities, and financing activities.
With a cash flow statement, also known as a statement of cash flows, you can see which specific parts of your business have generated income and incurred costs. The statement shows the opening balance, closing balance, and total cash movement for the period. You can use it to understand whether costs can be covered, or if money is moving out of the business faster than it's coming in.
Why cash flow statements matter
A business can be profitable on paper yet still run out of cash. The British Business Bank highlights cash flow management as a key concern for small businesses. That's because a profit and loss statement uses accrual accounting and includes non-cash items like depreciation, while a cash flow statement tracks only actual cash movements. Understanding this distinction is essential for making sound financial decisions.
Cash flow statements give you a clear view of how much money is available right now. This helps you decide when to pay suppliers, whether you can afford to hire, and how much stock to order. Without this visibility, it's easy to overcommit spending based on projected revenue that hasn't arrived yet.
Regularly reviewing your cash flow statement also supports better planning. By comparing statements across periods, you can spot seasonal patterns, identify recurring shortfalls, and build more accurate cash flow forecasts. For UK businesses operating under FRS 102, maintaining accurate cash flow records also supports compliance with financial reporting standards.
The three sections of a cash flow statement
A cash flow statement is split into the following sections:
- Cash flow from operations: This section includes the money your business generates from sales and trading, plus any money spent on the day-to-day costs of running a business, such as payroll, inventory, operating expenses, VAT, and interest on loans.
- Cash flow from investments: If you buy or sell business property or equipment, this shows up in the cash flow from investments section. For instance, you might purchase a new fleet of delivery vehicles or sell an old business premises if you relocate.
- Cash flow from financing: Money received from or paid back to investors or lenders shows up in this section. Money taken out or paid in by the business owner also appears here.
Ideally, the majority of your cash should come from operations. This means your business is making money from selling products or services. If a large proportion of your income is generated through selling business assets or loans from a lender, it's unlikely to be sustainable in the long term.
How to prepare a cash flow statement
Under UK company law, small companies aren't required to prepare a cash flow statement for their annual accounts, but the report can prove useful for understanding how your business makes and spends money.
Most small businesses in the UK prepare their cash flow statement under UK GAAP (FRS 102), the framework used for private company financial statements. Modern accounting software can help you compile a cash flow statement that complies with the right accounting standard for your business.
Under UK GAAP standards, small companies can choose either the direct or indirect method for preparing a cash flow statement. If you're preparing one for internal use, you don't need to follow specific company law rules.
Direct and indirect methods
The direct method of calculating a cash flow statement is relatively simple. It uses cash basis accounting, which means the statement covers money your business has actually received and spent, not invoices or bills that have been raised but not paid. You'll need receipts and invoices for all the money your business has spent and received in the specific period. Total all the cash inflows and outflows for operations, investments, and financing individually. Then subtract all of the outflows from the inflows to get your net cash for the selected period.
The indirect method of calculating cash flow is more complex; your accountant, bookkeeper, or accounting software can handle it for you. The indirect method uses the accrual basis, which means income and outgoings are attributed to the period when they're earned, even if the money hasn't changed hands yet.
When using the indirect method, start with the net income for that period and add or subtract based on the cash amounts for operations, investments, and financing. You also include non-cash items shown on a balance sheet, such as depreciation and inventory.
In both cases, you can create a cash flow statement with modern accounting software in a matter of clicks, or ask your accountant or bookkeeper to prepare one for you. If you're keeping accurate and complete accounting records, the information you need should be readily available.
How do you read a cash flow statement?
A cash flow statement is split into several different parts.
At the top of the document, you have the opening balance. This is the amount of money in your business at the beginning of the period your cash flow statement relates to.
Then you have the first cash flow section. This is for cash flow from operations, and includes money spent on staff, inventory, and other day-to-day expenses, plus money earned from sales of products or services. Your cash flow from operations will be totalled at the bottom of this section.
Next is the cash flow from investments section. If you bought or sold large equipment, business vehicles, or property, the money spent or generated through sales goes in this section. At the bottom of this section, you can see the total of cash flow from investments.
In the third section, cash flow from financing, loans and repayments to lenders are listed. Money the business owner takes out, and dividend payments, are usually listed here too. At the bottom of this section, you can view the total cash flow from financing.
At the bottom of the cash flow statement, all three sections are brought together. You'll see the net cash movement; this is how much your cash flow position has changed during the period. It can be a positive or negative number depending on whether cash flow increased or decreased overall. You'll also see the opening balance and closing balance for this period.
Cash flow statement example and template
If you want to see what a small business cash flow statement looks like, with a breakdown of each section and what they mean, check out this cash flow statement example. The example walks through each section line by line, so you can see how operating, investing, and financing activities fit together.
There's also a template you can use to produce your own cash flow statement by adding your business income and outgoings. It's a practical starting point, especially if you're preparing a statement for the first time.
Ready to manage cash flow with Xero
Maintaining a healthy cash flow starts by getting clear on exactly what your business spends and receives. Producing a cash flow statement regularly can help you get this clarity, and so can using modern accounting software, like Xero.
You can generate cash flow statements in a few clicks, using your live accounting records, with Xero's reporting tools. And because transactions flow into Xero automatically when you connect your bank account, you can also see your live cash flow in dashboards and visualisations. Produce cash flow forecasts, statements, and summaries to see your financial performance from all angles.
FAQs on cash flow statements
Here are answers to common questions about cash flow statements.
How often should I prepare a cash flow statement?
Monthly is a good starting point for most small businesses. Regular cash flow statements give you a clearer view of how money moves through your business and whether you're consistently covering costs. It's also worth preparing one before any big spending decision, so you can understand how well your business can absorb the cost.
Which method do UK small businesses usually use?
Many small businesses use the direct method because it relies on cash basis accounting, which tends to be the model smaller businesses follow. The indirect method is more common among larger companies that use accrual accounting.
What is free cash flow vs operating cash flow?
Operating cash flow is the cash generated from day-to-day trading activities, covering revenue from sales minus running costs. Free cash flow goes a step further by subtracting capital expenditure, such as equipment or property purchases, from your operating cash flow total. The result is money you're free to spend, reinvest, or save after covering all essential costs.
Do micro entities need a cash flow statement?
No, it isn't a legal requirement under company law for micro entities. However, preparing one can still help you understand your business performance. Note that small entities will need to provide a balance sheet and profit and loss accounts in their annual accounts filing with Companies House under upcoming changes to UK company law.
How do I fix negative operating cash flow?
Start by reviewing when and how you collect payments. Shorter payment terms and prompt-payment discounts can speed up cash coming in. Check your bill payment timing to make sure you're paying when it's optimal for your cash flow, without risking late fees. It's also worth reviewing operating costs to see if anything can be cut or renegotiated.
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