Cash flow statement
Learn what a cash flow statement is, what it shows, and how to read and prepare one.
Published Wednesday 12 August 2026
Table of contents
Key takeaways
- A cash flow statement tracks the actual cash moving in and out of your business over a set period, showing whether you can cover day-to-day costs regardless of profit on paper.
- It's split into three sections: operating activities, investing activities, and financing activities, each revealing a different source or use of cash.
- Positive cash flow means more money is coming in than going out, but it doesn't always mean your business is profitable, and negative cash flow isn't always a problem.
- Reading your cash flow statement regularly helps you spot payment delays, plan for quieter months, and make confident decisions about spending, hiring, or borrowing.
What is a cash flow statement?
A cash flow statement is a financial report that shows how much cash moves in and out of your business over a specific period. It's sometimes called a statement of cash flows.
Unlike a profit and loss statement, which includes non-cash items like depreciation, a cash flow statement focuses purely on actual money received and spent. This makes it one of the most practical tools for understanding whether your business can pay its bills, invest in growth, or repay debts.
What does a cash flow statement show?
A cash flow statement gives you a clear picture of your business's liquidity. It answers a straightforward question: where did your cash come from, and where did it go?
Specifically, it shows you:
- How much cash your core business operations generate
- Whether you're spending cash on long-term assets like equipment or property
- How you're funding the business, whether through loans, repaying debt, or owner contributions
- Your opening cash balance, the net movement across all three areas, and your closing cash balance
This helps you see whether your business is self-sustaining or relying on borrowing to stay afloat.
Who uses a cash flow statement?
Cash flow statements aren't just for accountants. Several groups rely on them to make decisions about your business.
- Business owners and managers: you can use it for day-to-day planning, budgeting, and spotting cash shortfalls before they become a problem.
- Investors and lenders: banks and investors look at your cash flow to assess whether you can repay a loan or generate a return on their investment.
- Accountants and bookkeepers: your accountant uses it alongside your profit and loss and balance sheet to give you a full picture of financial health.
The 3 parts of a cash flow statement
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
Every cash flow statement is divided into three sections. Each one covers a different type of cash movement, and together they explain how your overall cash position changed during the period.
Operating activities
This is the most important section because it shows whether your core business generates enough cash to keep running. Operating activities include cash received from customers and cash paid out for everyday costs.
Common items in this section include:
- Cash received from sales
- Payments to suppliers
- Wages and salaries
- Tax payments, including VAT paid to SARS
- Interest paid or received
If operating cash flow is consistently positive, your business is generating enough money from its day-to-day work to cover its running costs.
Investing activities
This section records cash spent on or received from long-term assets. It's about the bigger purchases and sales that shape your business over time.
Typical investing activities include:
- Buying equipment, vehicles, or property
- Selling a business asset
- Purchasing or selling investments
Negative cash flow from investing activities isn't necessarily bad. It often means you're putting money into growing your business.
Financing activities
This section covers how your business is funded. It includes cash from loans, repayments of debt, owner contributions, and any dividends paid out.
Common financing activities include:
- Taking out a business loan
- Repaying a loan or credit facility
- Owner putting money into the business
- Dividend payments
A business that regularly relies on financing activities to cover operating losses may be building up unsustainable debt.
What are cash and cash equivalents?
A cash flow statement tracks more than the money in your current account. It also covers cash equivalents, which are short-term, highly liquid investments you can turn into a known amount of cash quickly and with little risk.
Cash and cash equivalents usually include:
- Notes, coins, and the money in your business bank accounts
- Short-term deposits that mature within three months
- Money market instruments held for the short term
Bank overdrafts that form part of your day-to-day cash management are usually deducted when you work out your closing cash position. Knowing exactly what counts as cash helps you read the opening and closing balances on the statement correctly.
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. Both arrive at the same figure for net operating cash flow, but they take different routes to get there.
The direct method lists actual cash receipts and payments. You record every cash transaction from operations individually. It gives a detailed, transparent view, but it can be time-consuming to prepare.
The indirect method starts with your net profit and adjusts for non-cash items and changes in working capital. For example, it adds back depreciation, which reduces profit but doesn't involve actual cash leaving the business, and adjusts for movements in trade debtors and creditors (your accounts receivable and accounts payable).
In South Africa, cash flow statements are prepared under IAS 7 for companies applying full International Financial Reporting Standards (IFRS), or under Section 7 of the IFRS for SMEs standard for smaller companies. Which framework applies depends on your company's public interest score under the Companies Act 71 of 2008. The IFRS for SMEs standard doesn't favour one method over the other, so your accountant can advise on which suits your business.
How to prepare a cash flow statement
Once you understand the three sections, preparing a cash flow statement follows a clear sequence. These steps build the statement from your existing records.
- Choose your reporting period, whether that's a month, a quarter, or a full financial year.
- Note your opening cash balance, which is the cash and cash equivalents you held at the start of the period.
- Work out your net operating cash flow using either the direct or indirect method.
- Work out your net investing cash flow by totalling cash spent on or received from long-term assets.
- Work out your net financing cash flow from loans, repayments, owner contributions, and dividends.
- Add the three totals together to find your net cash movement for the period.
- Add the net cash movement to your opening balance to arrive at your closing cash balance.
Cloud accounting software can build this statement automatically from the transactions you've already recorded, so you don't have to prepare it by hand.
Positive vs negative cash flow
The bottom line of your cash flow statement tells you whether your business had positive or negative cash flow during the period. Both are worth understanding in context.
Positive cash flow
Positive cash flow means more cash came into your business than went out. This is generally a healthy sign. It means you can cover your costs, reinvest in the business, and build a cash buffer for quieter months.
However, positive cash flow doesn't always mean your business is profitable. For example, taking out a large loan creates a cash inflow, but it also creates a future repayment obligation. Always look at where the cash is coming from, not just the total.
Negative cash flow
Negative cash flow means more cash left your business than came in. This can feel alarming, but it's not always a crisis.
Planned investments, such as buying new equipment or fitting out new premises, can cause negative cash flow in a single period. What matters is the trend. If your operating cash flow is negative over several periods, it could signal a deeper problem. A one-off dip from a planned purchase is very different from ongoing losses.
How to read a cash flow statement
Reading a cash flow statement doesn't require an accounting qualification. Start with operating cash flow, because it's the most telling figure and shows whether your core business is self-funding.
Here's a practical approach to interpreting the numbers:
- Check whether operating cash flow is positive. If it is, your day-to-day business is generating cash.
- Compare operating cash flow across several periods. A consistent decline is a warning sign, even if the figure is still positive.
- Look at investing activities. Large outflows here might reflect growth spending, which is usually healthy.
- Review financing activities. Heavy reliance on loans to cover operating costs can indicate a cash flow problem.
Watch for these warning signs over multiple periods:
- Operating cash flow declining quarter after quarter
- Borrowing frequently to cover everyday expenses
- Selling assets to generate cash for running costs
If you spot any of these patterns, it's a good time to talk to your accountant about the underlying causes.
Cash flow statement vs income statement vs balance sheet
Your cash flow statement is one of the three core financial statements. Each shows something different, and you need all three to get a full picture of your business finances.
- Cash flow statement: tracks actual cash movements over a period. Shows whether you can meet your financial obligations right now.
- Income statement (profit and loss): shows your turnover, costs, and profit or loss over a period. Includes non-cash items like depreciation, so profit doesn't always equal cash in the bank.
- Balance sheet: a snapshot of what your business owns (assets), owes (liabilities), and the owner's equity at a single point in time.
A common situation shows why all three matter: your profit and loss might show a healthy profit, but your cash flow statement reveals you're struggling to collect payments from customers. Meanwhile, your balance sheet shows growing trade debtors. Together, they tell you that late payments are squeezing your cash position despite strong sales. For a fuller walkthrough of how the reports connect, see the guide to understanding financial statements.
Cash flow statement example
Here's a simplified cash flow statement for a fictional South African small business, a graphic design studio, for the quarter ending 31 March 2026.
Operating activities
- Cash received from clients: +R450,000
- Payments to suppliers: -R80,000
- Staff wages: -R180,000
- VAT payment to SARS: -R32,000
- Office rent: -R45,000
Net cash from operating activities: +R113,000
Investing activities
- Purchase of new computer equipment: -R35,000
Net cash from investing activities: -R35,000
Financing activities
- Loan repayment: -R20,000
Net cash from financing activities: -R20,000
Opening cash balance: R120,000
Net cash movement: +R58,000
Closing cash balance: R178,000
In this example, the business generated R113,000 from its core operations, spent R35,000 on equipment, and repaid R20,000 of a loan. The closing balance of R178,000 is higher than the opening balance, which is a positive sign. The key point is that the core business is generating more cash than it spends on day-to-day operations.
Why cash flow statements matter for your business
Cash flow is what keeps your business running. Even a profitable business can fail if it doesn't have enough cash to cover expenses when they're due. Late payment is a structural problem for South African small businesses. According to South Africa's National Treasury, R12.4 billion in government invoices to suppliers, most of them small businesses, remained unpaid beyond the mandatory 30-day deadline at the end of the second quarter of 2025 (see the National Treasury late-payment data).
That gap between issuing an invoice and receiving payment is exactly where cash flow statements prove their value. They help you see whether late payments are putting pressure on your ability to pay suppliers, staff, or tax obligations on time.
Regularly reviewing your cash flow statement helps you:
- Plan for quieter trading periods by building cash reserves during busier months, using a cash flow forecast to look ahead
- Identify whether you need to chase overdue invoices more actively
- Decide whether you can afford to hire, invest, or expand
- Present a clear financial picture to lenders or investors
- Stay on top of SARS VAT obligations with accurate, up-to-date records
Strong cash flow management starts with clear, accurate records, and a cash flow statement is one of the clearest views you can get.
Manage your cash flow with Xero
Understanding your cash flow statement is the first step. The next is having accurate, real-time financial data so you can act on what it tells you. Xero's cloud accounting software gives you live cash flow tracking and automated bank reconciliation, so you can see exactly where your money is at any time. Access all Xero features free for 30 days and get one month free.
FAQs on cash flow statements
Here are answers to some frequently asked questions about cash flow statements.
Do small businesses need to produce a cash flow statement?
Many South African small companies aren't required to include a full cash flow statement in their annual financial statements, depending on their reporting framework and public interest score. Preparing one is still valuable because it gives you a clear view of your liquidity and helps with planning.
How often should you review your cash flow statement?
Monthly is a good rhythm for most small businesses. Reviewing it regularly helps you spot trends, catch late payments early, and plan ahead for periods when cash might be tight.
What's the difference between cash flow and profit?
Profit is the difference between your turnover and your costs, including non-cash items like depreciation. Cash flow is the actual money moving in and out of your bank account. You can be profitable on paper but still run out of cash if customers are slow to pay.
Can a business survive with negative cash flow?
In the short term, yes, especially if the negative cash flow is caused by planned investment. However, sustained negative operating cash flow usually signals a problem that needs addressing, such as falling sales, rising costs, or slow-paying customers.
What's the easiest way to track cash flow?
Cloud accounting software like Xero connects to your bank account and updates your cash position automatically, which takes the manual work out of small business accounting. This gives you a real-time view without tracking every transaction by hand.
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.