cash flow statement formula business plan

Cash Flow Basics for Small Business Explained

Noah Parsons

13 min. read

Updated May 11, 2024

Cash is the lifeblood of every business, and running out of it is the number one reason that small businesses fail. Even if you are making plenty of sales, if you don’t have enough cash in the bank your business won’t be able to pay its bills and stay open.

That’s why it’s so important for businesses to understand the basics of cash flow and cash flow forecasting. We’ll be covering those elements and more throughout this guide.

• What is cash flow?

Cash flow measures how much money moves into and out of your business during a specific period.

Businesses bring in money through sales, returns on investments, and loans and investments—that’s cash flowing into the business.

And businesses spend money on supplies and services, utilities, taxes, loan payments, and other bills—that’s cash flowing out.

Cash flow is measured by comparing how much money flows into a business during a certain period to how much money flows out of that business during that period. 

You usually measure cash flow over a month or a quarter.

• How to calculate cash flow

The simplest formula for calculating cash flow is:

CASH RECEIVED – CASH SPENT = NET CASH FLOW

If your net cash flow number is positive, your business is cash flow positive, and accumulating cash in the bank.

If your net cash flow number is negative, your business is cash flow negative, and you are finishing the month with less cash than you started with.

What’s the difference between Cash and Profit?

Believe it or not, it’s possible for your business to be profitable but still run out of cash. That may not be intuitive initially, but it’s because cash and profits are very different. Here’s why.

Profits can include sales you’ve made but haven’t been paid for yet.

Cash, on the other hand, is the amount of money you actually have in your bank account. It represents your business’s liquidity; it’s not cash if you can’t use it right now to pay your bills.

For example, if you’re making a lot of sales but you invoice your customers, and they pay you “net 30,” or within 30 days of receiving the invoice, you could have lots of revenue on paper but not a lot of cash in your bank account because your customers haven’t paid you yet. Those sales will only show up on your income statement .

If the money your customers owe you hasn’t entered your bank account, it won’t appear on your cash flow statement yet. It isn’t available to your business at this point. It’s still in your customers’ hands, even though you’ve invoiced them. You keep track of the money your customers owe you in accounts receivable .

Meanwhile, you can only pay your bills with real cash in your bank account. It will be tough to fulfill orders, meet payroll, and pay rent without that cash. That’s why keeping track of cash flow is so important. 

To keep your business afloat, you need to have a good sense of what comes in and what goes out of your business every month and do everything you can to remain cash flow positive.

Dig deeper:

The difference between cash and profits

Learn more about the specific differences between cash and profits and how they impact your business.

The difference between cash flow and working capital

Cash flow and working capital tell different financial stories about your business. Cash flow deals with money moving in and out of your business while working capital compares assets and liabilities.

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• How to analyze a cash flow statement

When analyzing your historical cash flow statement, you’re looking at the amount of real cash you have on hand at the beginning of the month, compared to your cash at the end of the month. 

You can also look at your cash flow over different time frames – quarterly, for example – but a good rule of thumb is to regularly look at your cash flow to better understand any changes in the health of your business.

To see a visual example of how this works within a business, you can download this free cash flow example as a PDF or Excel sheet .

When conducting a cash flow analysis, you’ll want to be sure you understand the following key terms. 

Positive cash flow

Positive cash flow is defined as ending up with more liquid money on hand at the end of a given period of time compared to what was available when that period began.

Let’s say you started with $1000 in cash at the beginning of the month. You paid $500 in bills and expenses, and your customers paid you $2,000 for your services. Good news: Your cash flow is positive, at $1,500 for the month, leaving you with $2500 in cash.

If you have positive trending cash flow, it’s easier to:

• Pay your bills: Positive cash flow ensures employees get checks during each payroll cycle. It also gives decision makers the funds they need to pay suppliers, creditors, and the government.
• Invest in new opportunities: Today’s business world moves quickly. When cash is readily available, business owners can invest in opportunities that may arise at any given point in time.
• Stomach the unpredictable: Having access to cash means that whenever equipment breaks, clients don’t pay their invoices on time, or when new government regulations come into effect, businesses can survive.

Negative cash flow

Negative cash flow is when more cash is leaving the business than is coming in. When cash flow is negative, the amount of cash in your bank account is shrinking. This might not be a problem if your business has plenty of cash in the bank. But, it does mean that your business will eventually run out of money if it doesn’t become cash flow positive at some point.

Let’s say you started with $2,000 in the bank at the beginning of the month. You paid $1,500 in bills and expenses, and even though you did plenty of work and invoiced your customers for $3,000 worth of services, your customers only actually paid you $200. You’re still waiting for the rest of your payments to come in. Your cash flow is negative: -$1,300 for the month, leaving you with only $700 in cash.

If you don’t have any reserves, your rent check might bounce. If you have an established line of credit, you might rely on that to pay part of your bills. Maybe you forecasted your cash flow and knew that you were going to be short that month, so you made a plan to cover your expenses.

One month of negative cash flow won’t necessarily tank your business. But your business is at risk when you start to see a trend, and you don’t do nothing to reverse it (or when you’re unpleasantly surprised because you haven’t been tracking your cash flow). 

Cash Burn Rate and Runway

New businesses and startups often have negative cash flow when starting. They have lots of bills to pay while they’re getting up and running, and there aren’t a lot of sales yet. As revenue from sales starts to come in, hopefully, cash will flow into the business instead of just flowing out. 

This is why new businesses often need investment and loans to get started—they need cash in the bank to cover all of the negative cash flow during the business’s early days.

When starting out, it’s important to track Cash Burn Rate, which is essentially your negative cash flow number – the amount of money you are “burning” each month. You can then use that number to determine how many months of cash you have left – this is your “runway.” 

Read our detailed explanation of cash burn rate and cash runway to learn more about how to find, measure, and adjust these metrics.

Negative cash flow can also happen when a business chooses to invest in a new opportunity. The business could be betting that investing in a new opportunity now will pay off in the future. That investment could cause negative cash flow for some time, so it’s important to keep a close eye on cash and have a solid cash flow forecast in place so you know if your business is on track to stay in the black.

How positive and negative cash flow impact your business

Learn more about your relationship with positive and negative cash flow and how understanding these concepts will help you better understand your business health.

The importance of your burn rate and cash runway

Learn to calculate how much cash you’re using up and how long you have until it’s depleted.

15 tips for dealing with clients who won’t pay

A major factor that impacts your positive cash flow is clients paying on time. If delays in payment are leading to a cash flow crunch, there are a few things worth trying.

• Why cash flow forecasting is important

You’ll want to monitor your historical cash flow at least once a month so you can start spotting trends with what’s actually happening with your cash inflow and outflow.

But it’s not just measuring the past and present, forecasting your cash flow can also help you anticipate when your business might run low on cash in the future. You can then plan ahead and open a line of credit or find other loans and investments to help you cover that point in the future when you’re going to need a little extra cash.

It’s a lot easier to get help from a bank or investor before you’re actually in a crisis where you’re not sure you can cover your bills. If you wait until you’re really in trouble to take action, lenders may see you as too much of a risk and turn down your request.

Your cash flow forecast can also help you plan the best time to make a big purchase, like a new piece of equipment or a company vehicle.

Don’t forget to account for the unknown, though. Business owners can’t predict the future—particularly when it comes to any unforeseen expenses they might incur (e.g., a truck breaking down prematurely and needing replacement, or a data breach resulting in a forced increase in IT spend). And they also can’t know for certain that their clients will pay their bills on time.

So, when you’re forecasting or looking at your cash flow statement for last month, remember that having some buffer is a good thing. You don’t want to be in a position where you’ve allocated every single penny, to the point where you can’t accommodate unexpected expenses.

Part of reviewing your cash flow should be thinking about risk, and the effect an unexpected expense will have on your available cash—and ultimately, your ability to pay your bills.

How to forecast your cash flow and build a cash flow statement

A cash flow projection is all about predicting your money needs in advance. 

Unfortunately, though, forecasting your cash flow is a bit more complicated than forecasting other aspects of your business such as your sales and expenses. Your cash flow statement takes inputs from your revenue projections, your expense projections, and also your inventory purchase plans if your business keeps inventory on hand.

In addition to that, you need to predict when your customers will pay you – will all of them pay on time? Or will some take longer to pay?

A tool like LivePlan can greatly simplify cash flow forecasting, but you can also do it yourself with spreadsheets.

There are two methods you can use to build a cash flow statement : the direct method and the indirect method. While they will both arrive at the same end-result and predict how much cash you will have in the bank in the future, they accomplish that goal in different ways.

The direct method of forecasting cash flow

The direct method provides a very clear view of how cash moves in and out of a business. You essentially add up all the cash your business has received from various sources and then subtract all the cash that is paid out to suppliers, vendors, employees, etc. 

This number will be the amount of cash you’ve added or subtracted from your bank account during the month.

The indirect method of forecasting cash flow

The indirect method starts with your net income from your Profit and Loss Statement and then makes adjustments to that number to account for non-cash expenses such as depreciation. 

From there you make adjustments to account for changes in inventory, accounts receivable , and accounts payable .

The indirect method is very common for building historical cash flow statements because the required numbers are all easily generated from your accounting system. This makes it a fairly popular method for forecasting cash flow. 

However, the direct method is generally easier for people who aren’t as familiar with the intricacies of accounting.

Read our guide for a more detailed explanation of the two methods of creating a cash flow statement .

Forecasting cash flow

If you’re forecasting cash flow using spreadsheets, I recommend using the direct method. It’s easier and more straightforward.

Essentially, you want to create future estimates of when you’ll receive money from customers and when you’ll pay your bills. 

It’s not critical to forecast every invoice and bill payment, though. Forecasting is about helping you make strategic decisions about your business, so making broader estimates in your forecast is OK.

How to manage cash flow with an accurate forecast

Learn how to leverage your cash flow forecast to actively manage your business and improve your chances for growth.

• How to improve your cash flow

If your cash flow is negative or you’re just looking for ways to improve your cash flow in general, there are plenty of options available. Here’s a quick list of things you can do:

• Convince your customers to pay you faster
• Pay your own bills a bit slower
• Purchase less inventory and keep less inventory on hand
• Follow up on bad debts
• Establish a line of credit or other type of business loan

Depending on your situation, you may use these methods or even consider more drastic measures if the broader economy is impacting your ability to create positive cash flow.

Tips to improve your cash flow

Are you struggling to maintain healthy cash flow? Check out these ten tips to improve the health of your business.

How to prevent cash flow problems

The best way to improve your cash flow is by preventing problems before they ever start. Here are four ways to do it.

How to manage cash flow in a crisis

Here are five tips to help strengthen your cash position and keep your business healthy even when dealing with terrible circumstances.

How to balance cash flow in a seasonal business

Seasonal businesses have unique challenges you’ll want to consider, including variations on cash flow management. Check out these techniques to effectively balance your cash flow and avoid seasonal surprises.

Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

Table of Contents

• Cash vs profit
• How to forecast cash flow

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How to Read & Understand a Cash Flow Statement

• 30 Apr 2020

Whether you’re a working professional, business owner, entrepreneur, or investor, knowing how to read and understand a cash flow statement can enable you to extract important data about the financial health of a company.

If you’re an investor, this information can help you better understand whether you should invest in a company. If you’re a business owner or entrepreneur, it can help you understand business performance and adjust key initiatives or strategies. If you’re a manager, it can help you more effectively manage budgets , oversee your team, and develop closer relationships with leadership—ultimately allowing you to play a larger role within your organization.

Not everyone has finance or accounting expertise. For non-finance professionals , understanding the concepts behind a cash flow statement and other financial documents can be challenging.

To facilitate this understanding, here’s everything you need to know about how to read and understand a cash flow statement.

Access your free e-book today.

What is a Cash Flow Statement?

The purpose of a cash flow statement is to provide a detailed picture of what happened to a business’s cash during a specified period, known as the accounting period. It demonstrates an organization’s ability to operate in the short and long term, based on how much cash is flowing into and out of the business.

The cash flow statement is typically broken into three sections:

• Operating activities
• Investing activities
• Financing activities

Operating activities detail cash flow that’s generated once the company delivers its regular goods or services, and includes both revenue and expenses. Investing activities include cash flow from purchasing or selling assets—think physical property, such as real estate or vehicles, and non-physical property, like patents—using free cash, not debt. Financing activities detail cash flow from both debt and equity financing.

Based on the cash flow statement, you can see how much cash different types of activities generate, then make business decisions based on your analysis of financial statements .

Ideally, a company’s cash from operating income should routinely exceed its net income, because a positive cash flow speaks to a company’s ability to remain solvent and grow its operations.

It’s important to note that cash flow is different from profit , which is why a cash flow statement is often interpreted together with other financial documents, such as a balance sheet and income statement.

How Cash Flow Is Calculated

Now that you understand what comprises a cash flow statement and why it’s important for financial analysis, here’s a look at two common methods used to calculate and prepare the operating activities section of cash flow statements.

Cash Flow Statement Direct Method

The first method used to calculate the operation section is called the direct method , which is based on the transactional information that impacted cash during the period. To calculate the operation section using the direct method, take all cash collections from operating activities, and subtract all of the cash disbursements from the operating activities.

Cash Flow Statement Indirect Method

The second way to prepare the operating section of the statement of cash flows is called the indirect method . This method depends on the accrual accounting method in which the accountant records revenues and expenses at times other than when cash was paid or received—meaning that these accrual entries and adjustments cause the cash flow from operating activities to differ from net income.

Instead of organizing transactional data like the direct method, the accountant starts with the net income number found from the income statement and makes adjustments to undo the impact of the accruals that were made during the period.

Essentially, the accountant will convert net income to actual cash flow by de-accruing it through a process of identifying any non-cash expenses for the period from the income statement. The most common and consistent of these are depreciation , the reduction in the value of an asset over time, and amortization , the spreading of payments over multiple periods.

Related: Financial Terminology: 20 Financial Terms to Know

How to Interpret a Cash Flow Statement

Whenever you review any financial statement, you should consider it from a business perspective. Financial documents are designed to provide insight into the financial health and status of an organization.

For example, cash flow statements can reveal what phase a business is in: whether it’s a rapidly growing startup or a mature and profitable company. It can also reveal whether a company is going through transition or in a state of decline.

Using this information, an investor might decide that a company with uneven cash flow is too risky to invest in; or they might decide that a company with positive cash flow is primed for growth. Similarly, a department head might look at a cash flow statement to understand how their particular department is contributing to the health and wellbeing of the company and use that insight to adjust their department’s activities. Cash flow might also impact internal decisions, such as budgeting, or the decision to hire (or fire) employees.

Cash flow is typically depicted as being positive (the business is taking in more cash than it’s expending) or negative (the business is spending more cash than it’s receiving).

Related: How Learning About Finance Can Jumpstart Your Career No Matter Your Industry

Positive Cash Flow

Positive cash flow indicates that a company has more money flowing into the business than out of it over a specified period. This is an ideal situation to be in because having an excess of cash allows the company to reinvest in itself and its shareholders, settle debt payments, and find new ways to grow the business.

Positive cash flow does not necessarily translate to profit, however. Your business can be profitable without being cash flow-positive, and you can have positive cash flow without actually making a profit.

Negative Cash Flow

Having negative cash flow means your cash outflow is higher than your cash inflow during a period, but it doesn’t necessarily mean profit is lost. Instead, negative cash flow may be caused by expenditure and income mismatch, which should be addressed as soon as possible.

Negative cash flow may also be caused by a company’s decision to expand the business and invest in future growth, so it’s important to analyze changes in cash flow from one period to another, which can indicate how a company is performing overall.

Cash Flow Statement Example

Here's an example of a cash flow statement generated by a fictional company, which shows the kind of information typically included and how it's organized.

Go to the alternative version .

This cash flow statement shows Company A started the year with approximately $10.75 billion in cash and equivalents.

Cash flow is broken out into cash flow from operating activities, investing activities, and financing activities. The business brought in $53.66 billion through its regular operating activities. Meanwhile, it spent approximately $33.77 billion in investment activities, and a further $16.3 billion in financing activities, for a total cash outflow of $50.1 billion.

The result is the business ended the year with a positive cash flow of $3.5 billion, and total cash of $14.26 billion.

The Importance of Cash Flow

Cash flow statements are one of the most critical financial documents that an organization prepares, offering valuable insight into the health of the business. By learning how to read a cash flow statement and other financial documents, you can acquire the financial accounting skills needed to make smarter business and investment decisions, regardless of your position.

Are you interested in gaining a toolkit for making smart financial decisions and the confidence to clearly communicate those decisions to key internal and external stakeholders? Explore our online finance and accounting courses and download our free course flowchart to determine which best aligns with your goals.

Data Tables

Company a - statement of cash flows (alternative version).

Year Ended September 28, 2019 (In millions)

Cash and cash equivalents, beginning of the year: $10,746

OPERATING ACTIVITIES

Investing activities, financing activities.

Increase / Decrease in Cash and Cash Equivalents: 3,513

Cash and Cash Equivalents, End of Year: $14,259

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What Is Cash Flow?

• Formula & Calculation

Understanding Cash Flow

• Financial Statement
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Example of Cash Flow

The bottom line.

• Corporate Finance

Cash Flow: What It Is, How It Works, and How to Analyze It

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Cash flow is the net cash and cash equivalents transferred in and out of a company. Cash received represents inflows, while money spent represents outflows. A company creates value for shareholders through its ability to generate positive cash flows and maximize long-term free cash flow (FCF) . This is the cash from normal business operations after subtracting any money spent on capital expenditures (CapEx) .

Key Takeaways

• Cash flow is the movement of money in and out of a company.
• Cash received signifies inflows, and cash spent is outflows.
• The cash flow statement is a financial statement that reports a company's sources and use of cash over time.
• A company's cash flow can be categorized as cash flows from operations, investing, and financing.

Investopedia / NoNo Flores

Formula and Calculation of Cash Flow

You can easily calculate a company's cash flow using the formula below. To do this, make sure you locate the total cash inflow and the total cash outflow.

CF = TCI - TCO

• TCI = Total cash inflow
• TCO = Total cash outflow

Cash flow refers to the money that goes in and out of a business. Businesses take in money from sales as revenues (inflow) and spend money on expenses (outflow). They may also receive income from interest, investments, royalties , and licensing agreements and sell products on credit. Assessing cash flows is essential for evaluating a company’s liquidity , flexibility, and overall financial performance.

Positive cash flow indicates that a company's liquid assets are increasing, enabling it to cover obligations, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges. Companies with strong financial flexibility fare better, especially when the economy experiences a downturn, by avoiding the costs of financial distress .

Cash flows are analyzed using the cash flow statement , which is a standard financial statement that reports a company's cash source and use over a specified period. Corporate management, analysts, and investors use this statement to determine how well a company earns to pay its debts and manage its operating expenses. The cash flow statement is an important financial statement issued by a company, along with the balance sheet and income statement.

Cash Flow Statement

The cash flow statement acts as a corporate checkbook to reconcile a company's balance sheet and income statement . The cash flow statement includes the bottom line , recorded as the net increase/decrease in cash and cash equivalents (CCE) .

The bottom line reports the overall change in the company's cash and its equivalents over the last period. The difference between the current CCE and that of the previous year or the previous quarter should have the same number as the number at the bottom of the statement of cash flows.

Types of Cash Flow

Cash flows from operations (cfo).

Cash flow from operations (CFO) describes money flows involved directly with the production and sale of goods from ordinary operations. Also known as operating cash flow , CFO indicates whether or not a company has enough funds coming in to pay its bills or operating expenses .

Operating cash flow is calculated by taking cash received from sales and subtracting operating expenses that were paid in cash for the period. Operating cash flow is recorded on a company's cash flow statement, indicates whether a company can generate enough cash flow to maintain and expand operations, and shows when a company may need external financing for capital expansion.

Cash Flows From Investing (CFI)

Cash flow from investing (CFI) or investing cash flow reports how much cash has been generated or spent from various investment-related activities in a specific period. Investing activities include purchases of speculative assets , investments in securities, or sales of securities or assets.

Negative cash flow from investing activities might be due to significant amounts of cash being invested in the company, such as research and development (R&D) , and is not always a warning sign.

Cash Flows From Financing (CFF)

Cash flows from financing (CFF) shows the net flows of cash used to fund the company and its capital. CFI is also commonly referred to as financing cash flow . Financing activities include transactions involving issuing debt, equity, and paying dividends.

Cash flow from financing activities provides investors insight into a company’s financial strength and how well its capital structure is managed.

How to Analyze Cash Flows

Using the cash flow statement in conjunction with other financial statements can help analysts and investors arrive at various metrics and ratios used to make informed decisions and recommendations.

Below is Walmart's ( WMT ) cash flow statement for the fiscal year ending on Jan. 31, 2024. All amounts are in millions of U.S. dollars.

Investments in property, plant, and equipment (PP&E) and acquisitions of other businesses are accounted for in the cash flow from the investing activities section. Proceeds from issuing long-term debt, debt repayments, and dividends paid out are accounted for in the cash flow from the financing activities section.

Walmart's cash flow was positive, showing an increase of $1.09 billion, which indicates that it retained cash in the business and added to its reserves to handle short-term liabilities and fluctuations in the future.

How Are Cash Flows Different Than Revenues?

Revenue is the income earned from selling goods and services. If an item is sold on credit or via a subscription payment plan, money may not yet be received from those sales and are booked as accounts receivable. These do not represent actual cash flows into the company at the time. Cash flows also track outflows and inflows and categorize them by the source or use.

What Is the Difference Between Cash Flow and Profit?

Cash flow isn't the same as profit. Profit is specifically used to measure a company's financial success or how much money it makes overall. This is the amount of money that is left after a company pays off all its obligations. Profit is found by subtracting a company's expenses from its revenues.

What Is Free Cash Flow and Why Is It Important?

Free cash flow is left over after a company pays for its operating expenses and CapEx. It is the remaining money after items like payroll, rent, and taxes. Companies are free to use FCF as they please.

Do Companies Need to Report a Cash Flow Statement?

The cash flow statement complements the balance sheet and income statement. It is part of a public company's financial reporting requirements since 1987.

Why Is the Price-to-Cash Flows Ratio Used?

The price-to-cash flow (P/CF) ratio is a stock multiple that measures the value of a stock’s price relative to its operating cash flow per share. This ratio uses operating cash flow , which adds back non-cash expenses such as depreciation and amortization to net income.

P/CF is especially useful for valuing stocks with positive cash flow but are not profitable because of large  non-cash charges .

Cash flow refers to money that goes in and out. Companies with a positive cash flow have more money coming in, while a negative cash flow indicates higher spending. Net cash flow equals the total cash inflows minus the total cash outflows.

U.S. Securities and Exchange Commission. " Beginners' Guide to Financial Statements ."

U.S. Securities and Exchange Commission. " Explanation of Non-GAAP and Other Financial Measures ."

U.S. Securities and Exchange Commission. " Form 10-K ," Page 5.

FASB. " Summary of Statement No. 95 ."

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Cash Flow Statement (CFS)

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on March 27, 2023

Get Any Financial Question Answered

Table of contents, what is a cash flow statement (cfs).

A cash flow statement (CFS) is a financial statement that captures how much cash is generated and utilized by a company or business in a specific time period.

By looking at the cash flow statement, one can see whether the company has sufficient cash flowing in to pay its debts, fund its operations, and return money to shareholders via dividends or stock buybacks.

CFS bridges the income statement and balance sheet because it shows how money moves in and out of the business via three main channels: operating, investing, and financing activities.

It produces what is called the net cash flow by breaking down where the changes in the beginning and ending balances came from.

The cash flow statement is focused on the cash accounting method, which means that business transactions reflect in the financial statement when the cash flows into or out of the business or when actual payments are received or distributed.

Structure of the Cash Flow Statement

The Cash Flow Statement has three main sections: cash flows from operating activities, investing activities, and financing activities.

Together, these different sections can help investors and analysts determine the value of a company as a whole. Let us learn more about them below.

Cash Flow From Operating Activities (CFO)

This section covers cash transactions from all of a business’ operational activities, such as receipts from sales of goods and services, wage payments to employees, payments to suppliers, interest payments, and tax payments.

For an investment company or a trading portfolio, equity instruments or receipts for the sale of debt and loans are also included because it is counted as a business activity.

It can be considered as a cash version of the net income of a company since it starts with the net income or loss, then adds or subtracts from that amount to produce a net cash flow figure.

Items that are added or subtracted include accounts receivables, accounts payables, amortization, depreciation, and prepaid items recorded as revenue or expenses in the income statement because they are non-cash.

Cash Flow From Investing Activities (CFI)

This section is the result of investment gains and losses. It includes cash spent on property, plant, and equipment. Analysts look in this section to see if there are any changes in capital expenditures (CapEx) .

Companies could generate cash flow from investing by selling equipment, property, or assets . Loans given to vendors or received from customers, as well as any payments associated with mergers and acquisitions (M&A) , are also included in this section.

Cash-out items are those changes caused by the purchase of new equipment, buildings, or marketable securities. Cash-in items are when a company divests an asset.

Cash Flow From Financing Activities (CFF)

This section records the cash flow between the company, its shareholders, investors, and creditors. It provides an overview of cash utilized in business financing.

Transactions in CFF typically involve debt, equity , dividends , and stock repurchases.

Cash-out transactions in CFF happen when dividends are paid, while cash-in transactions occur when the capital is raised.

Thus, when a company issues a bond to the public, the company receives cash financing. In contrast, when interest is given to bondholders, the company decreases its cash.

How Cash Flow Is Calculated

There are two accepted methods in calculating cash flow: direct and indirect.

Direct Cash Flow Method

This method measures only the cash received, typically from customers, and the cash payments made, such as to suppliers. These inflows and outflows are then calculated to arrive at the net cash flow.

This method of calculating cash flow takes more time since you need to track payments and receipts for every cash transaction.

Figures used in this method are presented in a straightforward manner. They can be calculated using the beginning and ending balances of various asset and liability accounts and assessing their net decrease or increase.

Indirect Cash Flow Method

Using this method, cash flow is calculated through modifying the net income by adding or subtracting differences that result from non-cash transactions. This is done in order to come up with an accurate cash inflow or outflow.

Instead of presenting transactional data like the direct method, the calculation begins with the net income figure found in the income statement of the company and makes adjustments to undo the impact of accruals that were made during the accounting period.

The major differences between the two methods are outlined in the table below:

Examples of a Cash Flow Statement

To present a clearer picture of the two methods, there are some examples presented below.

Calculated Using the Direct Cash Flow Method

An example of the cash flow statement using the direct method for a hypothetical company is shown here:

In the above example, the business has net cash of $50,049 from its operating activities and $11,821 from its investing activities. It has a net outflow of cash, which amounts to $7,648 from its financing activities.

As a result, the business has a total of $126,475 in net cash flow at the end of the year.

Calculated Using the Indirect Cash Flow Method

This is another example of a cash flow statement of Nike, Inc. using the indirect method for the fiscal year ending May 31, 2021.

This cash flow statement shows that Nike started the year with approximately $8.3 million in cash and equivalents.

The business brought in $6.65 million through its operating activities. Meanwhile, it spent approximately $3.8 million in investment activities, and a further $1.45 million in financing activities.

The changes in the value of cash balance due to fluctuations in foreign currency exchange rates amount to $143 million.

Consequently, the business ended the year with a positive cash flow of $1.5 million and total cash of $9.88 million.

Importance of a Cash Flow Statement

The CFS is one of the most important financial statements for a business. Cash is the lifeblood of any organization, and a company needs to have a good handle on its cash inflows and outflows in order to stay afloat.

There are several reasons why the cash flow statement is so important:

Provides an Overview of Spending

The cash flow statement presents a good overview of the company’s spending because it captures all the cash that comes in and goes out.

This information is helpful so that management can make decisions on where to cut costs. It also helps investors and creditors assess the financial health of the company.

Maintains an Optimum Cash Balance

Another important function of the cash flow statement is that it helps a business maintain an optimum cash balance.

Management can use the information in the statement to decide when to invest or pay off debts because it shows how much cash is available at any given time.

Focuses on Generating Cash

The cash flow statement also encourages management to focus on generating cash.

This is because when a company knows where its cash is going, it can take steps to make sure that more cash is coming in than going out.

Useful as a Basis for Short-Term Planning

A cash flow statement is an important measurement because it provides information that can be used to make short-term plans.

For instance, if a company realizes that it will have a cash shortfall in the next month, it can take steps to ensure enough funds are available.

Limitations of the Cash Flow Statement

The Cash Flow Statement has a few limitations:

Inability to Compare Similar Industries

The cash flow statement is useful when analyzing changes in cash flow from one period to the next as it gives investors an idea of how the company is performing.

However, it does not measure the efficiency of the business in comparison to a similar industry. This is because terms of sales and purchases may differ from company to company.

Other companies may also have a higher capital investment which means they have more cash outflow rather than cash inflow.

Does not Replace the Income Statement

The cash flow statement does not replace the income statement as it only focuses on changes in cash. In contrast, the income statement is important as it provides information about the profitability of a company.

Lack of Focus on Profitability

The cash flow statement will not present the net income of a company for the accounting period as it does not include non-cash items which are considered by the income statement.

Therefore, it does not evaluate the profitability of a company as it does not consider all costs or revenues.

Cash Flow Statement vs Income Statement vs Balance Sheet

Three financial statements provide insights into the financial performance of a company and potential issues that may need to be addressed: the income statement, balance sheet , and cash flow statement.

These three documents offer unique information that serves as the foundation of corporate accounting.

Below is a comparison between cash flow statement, income statement, and balance sheet:

Final Thoughts

The cash flow statement is an essential financial statement for any business as it provides critical information regarding cash inflows and outflows of the company.

It helps businesses to make crucial decisions about spending, investments , and credit.

Cash flow statements display the beginning and ending cash balances over a specific time period and points out where the changes came from (i.e operating activities, investing activities, and financing activities).

This information allows businesses to forecast future cash needs, make informed investment decisions, and track actual performance against budgeted targets.

However, the cash flow statement also has a few limitations, such as its inability to compare similar industries and its lack of focus on profitability.

Therefore, it should always be used in unison with the income statement and balance sheet to get a complete financial overview of the company.

Cash Flow Statement (CFS) FAQs

What are the implications of positive and negative cash flows.

Positive cash flow reveals that more cash is coming into the company than going out. This is a good sign as it tells that the company is able to pay off its debts and obligations. Negative cash flow typically shows that more cash is leaving the company than coming in, which can be a reason for concern as the company may not be able to meet its financial obligations in the future. However, this could also mean that a company is investing or expanding which requires it to spend some of its funds.

What is the difference between direct and indirect cash flow statements?

Direct cash flow statements show the actual cash inflows and outflows from each operating, investing, and financing activity. While the indirect cash flow method makes adjustments on net income to account for accrual transactions.

What is the importance of cash flow statements?

Cash flow statements are important as they provide critical information about the cash inflows and outflows of the company. This information is important in making crucial decisions about spending, investments, and credit.

What are the main components of a cash flow statement?

The main components of a cash flow statement are cash flows from operating activities, investing activities, and financing activities.

How are cash flow and free cash flow different?

Cash flow is the total amount of cash that is flowing in and out of the company. Free cash flow is the available cash after subtracting capital expenditures.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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The Cash Flow Statement: What It Is and How to Use It

Posted july 2, 2020 by noah parsons.

Cash is the lifeblood of every business. Run out of cash, and you’re dead in the water—you can’t pay your bills or make payroll. That’s why understanding your cash flow statement is so important – it shows you how much cash you have in the bank and how cash is moving into and out of your business.

Even if you’re not up and running yet and just planning on launching a new business, creating a cash flow forecast will help you figure out how much cash you need to get started and how much cash you’ll need in the bank to stay in business during the first few months after you open your doors.

What is a cash flow statement?

A cash flow statement shows how cash is moving into and out of your business over a certain period of time, such as a month or a quarter. It shows where your cash is coming from and where you are spending your money and then calculates your cash flow to show if your business is generally spending more cash than it’s bringing in or accumulating cash over time.

The cash flow statement is one of three key financial statements for every business—the other two, an income statement (also known as a profit and loss statement ) and a balance sheet , complement the cash flow statement and help you see a full picture of your business’s finances.

The cash flow statement formula

You calculate your cash flow with a simple formula: subtract what you paid out (bills paid, for example) from the cash you brought in (your sales, new loans, and other sources of cash).

For example, last month, if you paid $10,000 in bills and received $15,000 in cash from your customers, your total cash flow would be $5,000. Here’s the basic formula:

Cash Flow = Cash Received – Cash Paid Out

A positive cash flow number means that you are adding cash to your bank account. A negative cash flow number means that you are spending

The difference between cash and profits

It’s important to understand that cash and profits are different things. Businesses can actually be profitable and be losing cash at the same time.

The easiest way to explain this is with a simple example:

Let’s say you sold $10,000 worth of consulting services last month, but your customer hasn’t paid you yet. You would record this sale to show that you had $10,000 in sales and then subtract your expenses (rent, office supplies, and so on) to calculate your profit. Let’s just say you had $5,000 worth of expenses. That means that you made a $5,000 profit last month.

Sales – Expenses = Profit

But remember: Your customer hasn’t paid you yet.

You probably sent them an invoice that said “net 30” or something like that on it. The money your client owes you but hasn’t paid yet is called accounts receivable . So, that $10,000 isn’t in your bank account yet. You did make a profit on paper, but you haven’t collected the cash yet.

There are a lot of additional differences between cash and profits. If you want a more detailed explanation, check out our article on cash versus profits.

Cash flow statement example

Here’s an example of what a cash flow statement looks like:

Cash flow calculations can be tricky, so I typically recommend that you use a tool to help you build your own cash flow statement to avoid mistakes and errors. LivePlan can handle all of the cash flow calculations for you if you want to avoid complicated Excel spreadsheets and formulas.

You can also download a free cash flow example here , either as a PDF or an Excel sheet.

How to make a cash flow statement

Let’s dive into explaining each row in a cash flow statement so you can make your own. I’ll go line-by-line and explain what each section means and where the numbers come from.

Editor’s note: We’re explaining the indirect method of calculating cash flow here. The indirect method is the most common and what is generated by most accounting systems. Another method, the direct method , is an alternate way of calculating and displaying your cash flow statement and is equally valid.

Net profit:

The net profit on your cash flow statement is your profits from your profit and loss statement (P&L). If the number is negative, this means that you took a loss—your expenses were greater than the sales that you made during that month.

Calculating your cash flow starts with your net profit and then makes adjustments to it (additions and subtractions) to figure out exactly how much cash is left in the business at the end of the month.

Depreciation and amortization:

When you purchase an asset (like a vehicle or other large piece of equipment), the cost of that asset is spread out over time on your Profit and Loss Statement, even if you paid cash up-front for the asset. This is called depreciation.

How an asset is depreciated is regulated by the government. Some asset purchases can be expensed on the profit and loss statement immediately, while others need to be expensed slowly over the course of many months or years.

On the cash flow statement, we need to deal with the depreciation expense by adding it back in, since it was subtracted as an expense on your profit and loss statement.

Change in accounts receivable:

If you bill your customers and they pay you 30 or 60 days after you have billed them, you have what’s called accounts receivable —the amount of money that’s owed to you. The accounts receivable line in your cash flow statement doesn’t show how much money is owed to you in total, but instead shows the change to accounts receivable—how much cash you received from customers who owe you money or how much additional money is owed to you compared to last month.

If the number is positive, that means that customers that owe you from previous months paid you, and you deposited their money in your bank account. If the number is negative, it means that customers owe you more money than they did last month.

Change in inventory:

If your company sells a product, you probably have inventory. You’re probably going to be buying inventory before it gets sold. When you purchase inventory, you don’t count it as an expense on your profit and loss statement. Instead, the cost of that inventory purchase shows up here on your cash flow statement. You’ll expense the inventory as you sell it, and that’s when it will show up on your profit and loss.

So, if you have a negative number here, that means that you’ve purchased more inventory than you’ve sold. Your products are still on your shelves. If you have a positive number, that means that you have purchased less inventory than you have sold.

This might not seem possible at first, but think of the example of a bike shop. A bike shop might only buy new bikes two or three times a year. In those months when the shop purchases a lot of bikes, there will be a big negative number in the inventory line of the cash flow statement. In the following months as the shop slowly sells that inventory, the inventory number will become positive.

Change in accounts payable:

Accounts payable is when you owe money to your vendors and suppliers. Just like how your customers might not pay you right away, you might not pay your vendors right away when you get the bill. Accounts payable keeps track of how much you owe.

The cash flow statement shows how much your accounts receivable balance has changed. If the number here is positive, you have received new bills during the month that you need to pay but you haven’t paid yet. If the number is negative, you have paid down more bills than you received during the month.

Change in income taxes and sales tax payable:

If you collect sales tax (or VAT, HST, GST, and so on) when you make a sale, and then have to give that money to the government, then you’ll show how much money was paid out to the government here in the sales tax payable row. If you pay income taxes, you’ll record those payments on an income taxes row..

For sales taxes, a positive number means that you have collected tax from your customers during the past month but not paid it to the government yet. A negative number means that you have paid more money to the government during the month than you have collected from your customers. This happens because there is often a lag of at least a month between when you collect sales taxes from customers and pay sales taxes to the government.

The income tax row offsets the income taxes that you expensed on your profit and loss statement but haven’t paid to the government yet. When you do make an income tax payment to the government, you’ll record that in this row of the cash flow statement.

Assets purchased or sold:

When you buy an asset, like a vehicle or a piece of equipment, you’ll subtract the cash you used to make that purchase.

If you borrow money to buy an asset, you’ll deal with how you receive the money from the loan and subsequent loan payments in the “changes to debt” lines of the cash flow statement.

If you sell an asset, the proceeds from that sale will show up here.

Investments received:

If you get investors to invest in your company, you’ll show that incoming cash here, on this line. For example, if an investor gives you $100,000 in June, you’ll show that entire influx of cash in your June cash flow statement.

Dividends and distributions:

If your company pays out dividends to its owners or makes any other kind of cash distribution that isn’t salary, you’ll show that number here.

Change in short-term debt and change in long-term debt:

These two lines, short term debt and long term debt, operate the exact same way, but are split up to differentiate the different types of loans or debt that your company is taking on.

Short-term debt is usually paid back within a year, while long-term debt can take much longer to pay off. If the numbers here are positive, that means that you’ve brought more cash into your business from loans that month than you’ve paid off. If the number is negative, that means that you are paying off more than you have borrowed during that month.

So if you get a loan from the bank in June for $25,000, payable over two years, and don’t start paying anything back until August, $25,000 will appear in the long term debt row for June. Nothing will appear there in July, and then in August, you start paying back in equal installments that appear as negative numbers.

Cash at beginning of period:

This is how much cash you have at the start of the reporting period. Here, you’re only talking about cash on hand in the bank. If the reporting period for your cash flow statement is one month, this is how much cash you had in the bank at the beginning of the month.

You’ll apply all of the various changes to your cash that happened during that period to this number—that’s what all the other rows in the cash flow statement do.

Net change in cash:

Once you’ve totaled up all of the changes in cash that have happened during your reporting period, you’ll show that number here.

This is basically the sum total of all the lines that we’ve defined here in this article (except for “cash at beginning of period”).

Cash at end of period:

Finally, take your cash from the beginning of the period, add (or subtract) the change in cash during the period, and you’ll end up with how much cash you have at the end of the period.

Cash flow statement vs cash flow forecast

A cash flow forecast is only different from a cash flow statement in that the forecast is predicting the future of your cash flow while the statement is showing what happened in the past. The forecast can help you predict when you might run low on cash in the future, or when you might be flush with cash and ready to expand or purchase that new truck or another piece of equipment.

Check out our guide to forecasting cash flow for more detail .

How a cash flow statement and a cash flow forecast can work together to grow your business

Did you know that you can use your cash flow statement to create an up-to-date and accurate forecast? Doing so provides you with a better understanding of how much cash you’re going to have in the coming weeks and months.

If you create a cash flow forecast , you can update it with your actual results from your statement on a monthly basis. If you’ve done the formulas in your forecast correctly, or if you’re using a tool like LivePlan , your forecast will automatically update with a more accurate prediction of the future based on your past performance.

For example, if your forecasting for the next 12 months starting in January, you can replace your forecasted numbers for January with your actual results when January is complete.

Following this pattern becomes more and more important as each month passes. If you don’t update your forecast, it will slowly diverge from reality and become less and less accurate. When your forecast of future cash is driven by the knowledge of what your current cash balance is, you’ll get a much more accurate picture of the future health of your business.

Use your cash flow statement as a management tool

When you have a solid understanding of your cash flow statement, it will become an essential tool to help you manage your business. It becomes especially important when things aren’t going quite to plan or there’s a change to the larger business environment that is impacting your business.

If you need advice on how to handle these situations, take a look at our guide to managing cash flow in a crisis , and learn how to improve your cash flow .

I hope this helps you make sense of your cash flow statement. It’s a critical tool to understand how your business is doing. And while It may seem complex, just remind yourself that it’s simply the cash that’s moving into and out of your business.

More importantly, you should forecast cash flow on a regular basis and compare your forecast to what actually happened (your “actuals”) on your cash flow statement to ensure that you’re going to have enough cash on hand to keep your business running. After all, it’s much easier to open a line of credit or get a business loan when your business is healthy than when it is in the middle of a cash crunch.

If you have questions, find me on Twitter @noahparsons .

Editor’s note: This article originally published in 2016. It was revised in 2020.

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How Is a Cash Flow Statement Prepared?

Table of Contents

Cash flow is essential to running a successful business. As a business owner, you need to have a good read on your company’s fiscal health, and cash flow statements can help you with this. These reports show how much money is going in and out of your company. Below, we break down how to prepare a cash flow statement, as well as other essential information about cash flow.

What is a cash flow statement?

A cash flow statement is a report that states how much money your business has earned and spent over a certain period. Cash flow statements also show you how much money you have on hand, as well as cash equivalents, like bank deposits, short-term investments and other assets that can be converted into cash. This does not include credit items, like invoices you’ve sent but haven’t yet received payment on or bills that you’ve received but haven’t yet paid.

“A cash flow statement is a great tool to give business owners insight into where their actual cash is spent, since most businesses are run on an accrual basis,” said Katie Thomas, a certified public accountant and corporate controller at Upward Projects restaurant group.

How is a cash flow statement prepared? 

The easiest way to create a cash flow statement is to use small business accounting software to generate it as a report. If you don’t like using accounting software, or your program doesn’t have this option, you can use free cash flow statement templates available online.

Wherever you choose to get the basic format for your cash flow statements, it’s important to decide whether you will use the direct method or the indirect method for the calculation.

Indirect method

Many businesses use the indirect method because it’s simpler. Starting with your company’s net income statement (i.e., profit and loss statement ), you add or subtract the increases or decreases, using the line items from the balance sheet . Keep in mind that a company’s income statements are done on an accrual basis, so only earned revenue (not received earnings) is considered.

The indirect method includes nonoperating activities that don’t affect a business’s operating cash flow. Depreciation, for example, isn’t a cash expense, but it is used to calculate cash flow.

Direct method

The direct method uses gross cash receipts and gross cash payments to prepare cash flow statements. This includes money paid to suppliers, receipts from customers, interest and dividends received, cash paid out or received, interest paid and income taxes paid.

The direct method is more time-consuming because, unlike the indirect method, it requires you to track operating cash receipts and payments for every transaction. You also must reconcile your cash flow statement with your income statement. Learn more about what’s included in a cash flow statement below.

What is the purpose of a cash flow statement?

A cash flow statement allows you to see the financial status of your company —  specifically, whether you’re bringing in enough money to pay the bills.

For instance, if a cash flow statement indicates you have a deficit, you may need to make some changes to increase your cash flow , such as raising prices or shortening your payment terms. Or, if you have a cash surplus, you may decide now is a good time to buy new equipment.

Additionally, a cash flow statement, along with your balance sheet and income statement, is often required by banks or investors when you seek financing. Using your cash flow statement, the lender can determine if your business is fiscally sound and will be able to repay the loan or investment. [Review this roundup of cash flow problems and how to solve them .]

What is included in a cash flow statement?

A cash flow statement has three parts: operating activities, investing activities and financing activities.

Operating activities

The operating activities section of the cash flow statement shows how much cash you have coming in and going out as part of your daily business operations within a specific period. It includes money you spend on materials and payroll, as well as money you bring in from sales. 

Investing activities

The investing activities section shows the amount of cash you’ve earned or spent on long-term investments within a specific period. In addition to stocks and bonds, investments can include the buying or selling of large assets, such as buildings, property or equipment.

Financing activities

The financing activities section shows how your business raises its capital and pays back its debts. Anything associated with loans or the issuing or buyback of stocks is included in this section.

What are the limitations of a cash flow statement?

A cash flow statement is a good tool for examining your past financial decisions, but it doesn’t help you predict your business’s future.

“A cash flow statement is historically based,” said Katie Swanson, a certified public accountant, certified valuation analyst and founder of Change Collaborative. “It does not help a business look forward to manage cash today, next week or a month from now. Business owners are concerned with the ongoing operations of their business, not what happened last year.”

Swanson also noted that business owners who don’t have a background in accounting may find it hard to understand cash flow statements.

“The information is not presented in a way that makes sense to non-accountants,” she said. “Therefore, the information is difficult for small business owners to use when making decisions.”

How is cash flow calculated?

The easiest way to calculate cash flow is to run a cash flow report in your accounting software. If you plan to calculate it manually, you’ll need your balance sheet and income statement.

Cash flow statements are made up of two main parts: operating cash flow and financing cash flow.

Operating cash flow

Operating cash flow comes from the daily work within your business. It is made up of your net profit or loss and changes in assets and liabilities between periods. In its simplest form, operating cash flow comprises the following parts: 

Operating cash flow = net income + depreciation + other noncash charges – increase in net working capital 

Financing cash flow

Financing cash flow is made up of changes in your bank debt, shareholder debt and other long-term debt between periods. You can use this equation to calculate financing cash flow: 

Financing cash flow = cash from equity/debt issuance – (dividends + repurchase of debt/equity)

Net cash flow

In a cash flow statement, the goal is to measure your operating cash flow and financing cash flow. This simple formula leads to your net cash flow: 

Net cash flow = operating cash flow + financing cash flow

Operating cash flow and financing cash flow both fluctuate over the short term, depending on the needs and performance of the business. Over the long term, however, cash flow must be positive if the business is to survive.

How do accounts payable and accounts receivable relate to cash flow?

It’s vital to understand the difference between accounts receivable and accounts payable , because both affect your cash flow. Accounts payable refers to the money your company owes its suppliers, and accounts receivable are what your customers owe you. 

To calculate the amount of cash flow affected by your accounts payable, subtract the current period’s dollar amount for accounts payable from the last period. If the difference is a positive amount, your cash flow has increased by that number within that period. If the number is negative, it means cash flow has gone down by that dollar amount.

For accounts receivable, the calculation is the same. However, when the difference is a positive number, this is considered the use of cash and represents the dollar amount by which your cash flow has decreased. A negative number represents how much your cash flow has increased.

Mike Berner contributed to this article. Source interviews were conducted for a previous version of this article. 

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What is cash flow formula & how to calculate it.

Twenty-nine percent of small businesses fail because they run out of money. To avoid this, you need to know how to calculate cash flow for your company before it gets too late. Luckily, there are different cash flow formulas to help small businesses monitor how money moves in and out as they go about their day-to-day operations.

This article covers three simple methods for calculating cash outflow and inflow:

Cash Flow Statement Formula

• Free Cash Flow Formula
• Operating Cash Flow Formula 

Here’s What We’ll Cover:

Free Cash Flow Formula 

Operating cash flow formula, why calculating cash flow is important, wrapping up.

More Accounting Resources for Businesses

A cash flow statement is one of the most important accounting documents for small businesses. 

A cash flow statement is a record of financial transactions over time. In a cash flow statement, you will find information like:

• Operating Activities: This is the money used for day-to-day business operations, including cash payments and other financial activities. 
• Investing Activities: This refers to cash for business investments.
• Financing Activities: This is the money generated from business loans and capital contributions. 

Some businesses also list non-cash expenses in their statements. Companies use these data sets for cash flow calculations. 

How to Calculate Cash Flow Using a Cash Flow Statement

Add or subtract all the cash from operating activities , investing activities , and financing activities . Then, add the result to your beginning cash balance. This is interpreted as; 

Cash Flow = Cash from operating activities +(-) Cash from investing activities +(-) Cash from financing activities + Beginning cash balance

Here’s how this formula would work for a company with the following statement of cash:

• Operating Activities = $30,000
• Investing Activities = $5,000 
• Financing Activities = $5,000  
• Beginning Cash = $50,000  

Cash Flow = $30,000 +(-) $5,000 +(-) $5,000 + $50,000 = $70,000

While a cash flow statement shows the cash inflow and outflow of a business, free cash flow is a company’s disposable income or cash at hand. 

It is the leftover money after accounting for your capital expenditure and other operating expenses . Free cash flow helps companies to plan their expenses and prioritize investments. 

How to Calculate Free Cash Flow

Add your net income and depreciation , then subtract your capital expenditure and change in working capital.    

Free Cash Flow = Net income + Depreciation/ Amortization – Change in Working Capital – Capital Expenditure.

• Net Income is the company’s profit or loss after all its expenses have been deducted. 
• Depreciation and Amortization : Depreciation accounts for the reduction of a current asset’s value over time, while amortization means spreading the cost of an intangible asset over its lifetime. 
• Working Capital is the money used for running the daily activities of a business. 
• Capital Expenditure refers to fixed   business assets like land and equipment. 

You’ll find these financial numbers in your company’s balance sheet or income statement . Here’s a practical example of how this cash flow analysis works.

Let’s say your flow from operations at the end of the first quarter are as follows; 

• Net Income = $100,000
• Depreciation = $2000
• Change in Working Capital = $15,000
• Capital Expenditure = $40,000 

Free Cash Flow = $100,000 + $2,000 – $15,000 – $40,000 = $47,000

Operating cash flow is the money that covers a business’s running costs over a fixed period of time. 

Wondering how this is different from free cash flow? Unlike the latter, operating cash flow covers unplanned expenses, earnings, and investments that can affect your daily business activities. 

Tracking cash from operations gives businesses a clear idea of how much they need to cover operating expenses over a specific period. Companies can also use a cash flow forecast to plan for future cash inflows .

How to Calculate Operating Cash Flow (With Example) 

Calculating cash flow from operations is easy. All you have to do is subtract your taxes from the sum of depreciation, change in working capital, and operating income. 

Operating income is also called earnings before interest and tax (EBIT), and it shows how profitable a company is before tax deductions and interest expenses. You’ll find this information in your financial statement. 

Operating Cash Flow = Operating Income + Depreciation – Taxes + Change in Working Capital.

If a company has an operating income of $30,000, $5,000 in taxes, zero depreciation, and $19,000 working capital, its operating cash flow is: $30,000 – $5,000 + $19,000 = $44,000. 

• Investors use discounted cash flow to determine the value of a business and peg their rate of return.
• It allows for better business decision-making.
• A positive cash flow shows that your company is healthy. 

Knowing how to calculate cash flow can be a game-changer for small businesses. At first, it can be challenging, but you will manage your business finances better once you get the hang of things. 

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How to create a cash flow projection (and why you should)

For small business owners, managing cash flow (the money going into and out of your business) can be the difference between a thriving, successful company and filing for chapter 11 (aka bankruptcy).

In fact, one study showed that 30% of businesses fail because the owner runs out of money, and 60% of small business owners don’t feel knowledgeable about accounting or finance .

Understanding and predicting the flow of money in and out of your business, however, can help entrepreneurs make smarter decisions, plan ahead, and ultimately avoid an unnecessary cash flow crisis.

After all, knowing whether the next month will see a financial feast or famine can help you make better decisions about spending, saving, and investing in your business today.

One way to do this (without hiring a psychic)? Cash flow projection.

What is cash flow projection?

Cash flow projection is a breakdown of the money that is expected to come in and out of your business. This includes calculating your income and all of your expenses, which will give your business a clear idea on how much cash you'll be left with over a specific period of time.

If, for example, your cash flow projection suggests you’re going to have higher than normal costs and lower than normal earnings, it might not be the best time to buy that new piece of equipment.

On the other hand, if your cash flow projection suggests a surplus , it might be the right time to invest in the business.

Cash flow projections: The basics

In order to properly create a cash flow forecast, there are two concepts you should be aware of: accounts receivable (cash in) and accounts payable (cash out)

• Accounts Receivable: refers to the money the business is expecting to collect, such as customer payments and deposits, but it also includes government grants , rebates, and even bank loans and lines of credit .
• Accounts Payable: refers to the exact opposite—that is, anything the business will need to spend money on. That includes payroll , taxes, payments to suppliers and vendors, rent, overhead, inventory, as well as the owner’s compensation.

A cash flow projection (also referred to as a cash flow forecast) is essentially a breakdown of expected receivables versus payables. It ultimately provides an overview of how much cash the business is expected to have on hand at the end of each month .

Cash flow projections typically take less than an hour to produce but can go a long way in helping entrepreneurs identify and prepare for a potential shortfall, and make smarter choices when running their business.

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How to calculate your cash flow projection

Calculating your cash flow projection can seem intimidating at first, but once you start pulling together the necessary information, it isn’t so scary. Let’s walk through the first steps together.

1. Gather your documents

This includes data about your business’s income and expenses.

2. Find your opening balance

Your opening balance is the balance in your bank at the start of a period. (So, if you’ve just started your business, this is zero.)

Your closing balance is the amount in your bank at the end of the period.

So the opening balance in one month should equal the closing balance at the end of the previous month. But more on this later.

3. Receivables (money received/cash in) for next period

This is an estimate of your anticipated sales (such as invoices you expect to be paid, or payments made on credit), revenue, grants , or loans and investments.

4. Payables (money spent/cash out) for next period

Again, this is an estimate. You should consider things like materials, rent, taxes, utilities, insurance, bills, marketing, payroll, and any one-time or seasonal expenses.

“Seasonality can have a material effect on the cash flow of your business,” Andy Bailey, CEO of Petra Coach, wrote in an article for Forbes . “A good cash flow forecast will anticipate when cash outlays and cash receipts are higher or lower so you can better manage the working capital needs of the company.”

5. Calculate cash flow

Now, let’s bring it all together using this cash flow formula : Cash Flow = Estimated Cash In – Estimated Cash Out

6. Add cash flow to opening balance

Now, you’ll want to add your cash flow to your opening balance, which will provide you with your closing balance.

Put it all together: How a cash flow projections look on paper

In practical terms, a cash flow projection chart includes 12 months laid out across the top of a graph, and a column on the left-hand side with a list of both payables and receivables.

Here are all the categories you’ll need for your cash flow projection:

• Opening balance/operating cash
• Money received (cash sales, payments, loans, investments, etc.
• Money spent (expenses, materials, marketing, payroll and taxes, bills, loans, etc.)
• Totals for money received and money spent, respectively
• Total cash flow for the period
• Closing balance

This column typically begins with “operating cash”/opening balance or unused earnings from the previous month. For example, if your cash flow projection for January suggests a surplus of $5,000, your operating cash for February is also $5,000.

Below operating cash, list all expected accounts receivable sources—such as sales, loans, or grants—leaving a space at the bottom to add them all up.

Next, list all potential payable items—such as payroll, overhead, taxes, and inventory—with another space to add their total below.

Once you have your numbers prepared, simply subtract the total funds that are likely to be spent from the cash that is likely to be received to arrive at the month’s cash flow projection.

Once you’ve calculated your monthly cash flow, take the final number and list it at the top of the next month’s column under operating cash, and repeat the process until you’ve got a forecast for the next 12 months.

After the end of each month, be sure to update the projection accordingly, and add another month to the projection.

If you’re a Wave customer and you prefer to use a ready-made chart to help you create your projection, you can pull your financial data from the Reports section of Wave and feed it into this cash flow forecast template .

Be realistic with your cash flow forecast

Cash flow projections are only as strong as the numbers behind them, so it’s important to be as realistic as possible when putting yours together.

For example, being overly generous in your sales estimates can compromise the accuracy of the projection.

Furthermore, if you provide customers with a 30-day payment schedule and a majority pay on the last possible day, make sure that cycle is accurately reflected in your projection.

On the payables side of the equation, try to anticipate annual and quarterly bills and plan for an increased tax rate if the business is likely to reach a new tax level.

Those who pay their staff on a bi-weekly basis also need to keep an eye out for months with three payroll cycles, which typically occurs twice each year.

“Monthly or quarterly forecasts generally are more useful for stable, established businesses,” Bailey also wrote . “Weekly projections will be essential for companies scaling up or going through significant changes, such as a restructuring or merger/acquisition.”

“We like to encourage business owners—especially those who are starting out—to create a 13-week forecast for cash,” William Lieberman, the Managing Partner of The CEO’s Right Hand, told Forbes . “Each week, update the forecast based on what happened the previous week and extend the forecast window by one more week. In this way, you can keep a close watch on exactly what’s coming in and going out so you can be more proactive in addressing potential cash crunches.”

Those who want to be extra cautious with their projections can even include an “other expenses” category that designates a certain percentage of revenues for unanticipated costs. Putting aside some extra cash as a buffer is especially useful for those building their first projections, just in case they accidentally leave something out.

What now: Use your cash flow forecast to make data-driven decisions

Building the cash flow projection chart itself is an important exercise, but it’s only as useful as the insights you take away from it. Instead of hiding it away for the remainder of the month, consult your cash flow projection when making important financial decisions about your business.

If, for example, you anticipate a deficit in the months ahead, consider ways to cut your costs , increase sales, or save surpluses to help make up the difference. If you notice that payments often come in late, consider introducing a late penalty for bills past due.

You can also consult your cash flow projection to determine the best time to invest in new equipment, hire new staff, revise your pricing and payment terms, or when to offer promotions and discounts.

Have clients that regularly procrastinate on payments? Check out these tactics to get your clients to pay you faster .

Improving the accuracy of cash flow projections over time

Once you’re in the habit of creating cash flow projections, it becomes easier to improve their accuracy over time.

Comparing projections to actual results can help you improve the accuracy of your cash flow projections, and help identify longer-term patterns and cycles. Seasonal changes in revenue, patterns that contribute to late payments, and opportunities to cut costs will all become more apparent with each new cash flow projection.

While all these benefits won’t come all at once, entrepreneurs can use their cash flow projection to become better operators and better decision makers with each passing month.

Cash flow projection FAQs

How do cash flow projections affect business decisions, and how can small business owners improve their accuracy.

Cash flow projections play a key role in how you make business decisions by giving you important info on the movement of money in and out of your business You can up their accuracy by regularly updating projections, comparing them to actual results, and adjusting for any discrepancies. This helps you make smart choices about spending, saving, and investing in your business.

What industry-specific factors should small business owners consider in cash flow projections?

Small business owners need to consider various industry-specific factors when creating cash flow projections. For instance, seasonal changes in revenue, payment cycles, and market trends can significantly impact cash flow. By analyzing these factors, you can tailor your projections to better reflect the realities of your industry and adjust your strategies accordingly.

How can small business owners make sure their cash flow projections are reliable?

Small business owners often face challenges in making cash flow projections due to uncertainties in revenue, expenses, and market conditions. To ensure reliability, you should try to be realistic in your estimates, account for potential fluctuations, and regularly update your projections based on actual performance. Additionally, seeking advice from financial experts and using tools like cash flow forecasting templates can help with these challenges and improve the accuracy of projections over time.

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Free Cash Flow Statement Templates

By Andy Marker | May 8, 2017

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A cash flow statement, also referred to as a statement of cash flows, shows the flow of funds to and from a business, organization, or individual. It is often prepared using the indirect method of accounting to calculate net cash flows. The statement is useful for analyzing business performance, making projections about future cash flows, influencing business planning, and informing important decisions. The term “cash” refers to both income and expenditures and may include investments and assets that you can easily convert to cash. By conducting a cash flow analysis, a business can evaluate its liquidity and solvency, compare performance among accounting periods, identify cash flow drivers to support growth, and plan ahead to maintain a positive cash position.

Below you’ll find a collection of easy-to-use Excel templates for accounting and cash flow management, all of which are fully customizable and can be downloaded for free. 

Accounts Payable Template

Download Accounts Payable Template

Excel | Smartsheet

This accounts payable template tracks suppliers, order numbers, and amounts due to help you manage payments and due dates. Easily organize ordering stock or supplies from multiple vendors with this template for greater efficiency and fewer errors.

Accounts Receivable Template

Download Accounts Receivable Template

Excel   | Smartsheet

Don’t let balances owed to your business slip through the cracks. This template accounts receivable template lists customers, invoice tracking details, amounts due, and outstanding balances. Keeping track of these accounts can inform your collections process by helping you quickly identify which overdue payments have aged significantly.

Balance Sheet Template

Download Balance Sheet Template

A balance sheet provides a summary of financial health in a single, brief report. With this balance sheet template, you can assess the financial standing of a business by examining assets, liabilities, and equity. Business owners can use it to evaluate performance and communicate with investors.

Income Statement Template

Download Income Statement Template

Use this income statement template to assess profit and loss over a given time period. This template provides a clear outline of revenue and expenses along with net income figures. You can edit the template to match your needs by adding or removing detail, and create an income statement for a large or small business.

Simple Cash Flow Template

Download Simple Cash Flow Template

This template works for any length of time and allows you to compare different periods for a quick analysis of cash flows. It include sections for an itemized list of revenue and expenditures, automatic calculations of totals and net cash flows, and a simple layout for ease of use. You can modify the template by adding or removing sections to tailor it to your business.

3-Year Cash Flow Statement Template

Download 3-Year Cash Flow Statement Template

Use this statement of cash flows template to track and assess cash flows over a three-year period. The template is divided into sections for operations, investing, and financing activities. Simply enter the financial data for your business, and the template completes the calculations.

Monthly Cash Flow Template

‌ Download Monthly Cash Flow Template

This comprehensive template offers an annual overview as well as monthly worksheets. Create a detailed monthly cash flow report to analyze performance or plan for the future. Each month has a separate sheet so that you can get a thorough picture of cash inflows and outflows for both short- and long-term periods.

Daily Cash Flow Template

‌ Download Daily Cash Flow Template

Add receipts and payments to this daily cash flow template to get a deep understanding of business performance. You can customize the list of cash inflows and outflows to match your company’s operations.

12-Month Cash Flow Forecast

Download 12-Month Cash Flow Forecast

Use this template to create a cash flow forecast that allows you to compare projections with actual outcomes. This template is designed for easy planning, with a simple spreadsheet layout and alternating colors to highlight rows. You get a snapshot of cash flows over a 12-month period in a basic Excel template.

Quarterly Cash Flow Projections Template

‌ Download Quarterly Cash Flow Projections Template

Cash flow projection templates can cover a variety of time frames, including the quarterly format offered here. Quarterly projections are useful for new businesses and those wanting to align cash flow projections with upcoming goals and business activities. Use the template to create projections and then compare the variance between estimated and actual cash flows.

Cash Flow Analysis Template

‌ Download Cash Flow Analysis Template

You can use this template to perform a cash flow sensitivity analysis in order to anticipate shortfalls and help your business maintain a positive cash position. This analysis can help you make more accurate cash flow predictions and inform your business decisions.

Discounted Cash Flow Template

‌ Download Discounted Cash Flow Template

This template allows you to conduct a discounted cash flow analysis to help determine the value of a business or investment. Enter cash flow projections, select your discount rate, and the template calculates the present value estimates. This template is a useful tool for both investors and business owners.

Nonprofit Cash Flow Projection Template

‌ Download Nonprofit Cash Flow Projection Template

This template is designed with nonprofit organizations in mind and includes some common income sources, such as donations and grants, as well as expenditures. The template covers a 12-month period and makes it easy to see annual and monthly carryover so that you can track a rolling cash balance. Create a detailed list of all receipts and disbursements that are relevant to your organization.

Personal Cash Flow Template

‌ Download Personal Cash Flow Template

Individuals can manage their personal cash flow with this free template. The simple layout makes it easy to use and provides a financial overview at a glance. Keep track of how you are spending money to gain more control over your financial habits and outlook.

Trial Balance Worksheet

Download Trial Balance Worksheet

Use this trial balance template to check your credit and debit balances at the end of a given accounting period, and to support your financial statements. The template shows ending balances for specific accounts, as well as total amounts for the activity period and the overall difference. This is a simple worksheet that you can customize to reflect your business type and the products or services it offers.

Excel Bookkeeping and Cash Flow Templates

To help you get started creating a cash flow statement or forecast, we’ve included a variety of customizable templates that you can download for free. Simply adjust your chosen template to fit your specific goals and the intended audience. Each template offers a clean, professional design and is intended to save you time, boost efficiency, and improve accuracy. Just enter your financial data, and the templates will perform automatic calculations for you to analyze. By combining your cash flow statement with a balance sheet, income statement, and other forms, you can manage cash flow and get a comprehensive understanding of business performance. Smartsheet offers additional Excel templates for financial management, including business budget templates .

Elements of a Cash Flow Statement

A cash flow statement is typically divided into the following sections to distinguish among different categories of cash flow:

• Operating Activities: Cash flows in this section will follow a company’s operating cycle for an accounting period and include things like sales receipts, merchandise purchases, salaries paid, and various operating expenses.  
• Investing Activities: Some examples of investing activities include buying or selling assets, making loans and collecting payments, and generating cash inflows or outflows from other investments.
• Financing Activities: This section may include activities such as receiving money from creditors or shareholders, repaying loans and paying dividends, and selling company stock, as well as other activities that impact equity and long-term liabilities.

A statement of cash flows can summarize information for any accounting period, but if you’re starting a new business or planning for the months ahead, creating a cash flow projection can help you anticipate how much money your business will have coming in and going out during a future time frame.

Creating a Cash Flow Forecast

Projecting future cash flows can give you greater financial control, provide a deeper understanding of a company’s performance, help identify shortfalls in advance, and support business planning so that activities and resources are properly aligned. New businesses trying to secure a loan may also require a cash flow forecast. 

In order to set yourself up for success, it’s imperative to be realistic when forecasting cash flows. You can build your projections on a foundation of key assumptions about the monthly flow of cash to and from your business. For instance, knowing when your business will receive payments and when payments are due to outside vendors allows you to make more accurate assumptions about your final funds during an operating cycle. Estimated cash flows will always vary somewhat from actual performance, which is why it’s important to compare actual numbers to your projections on a monthly basis and update your cash flow forecast as necessary. It’s also wise to limit your forecast to a 12-month period for greater accuracy (and to save time). On a monthly basis, you can add another month to create a rolling, long-term projection.

A cash flow forecast may include the following sections:

• Operating Cash: The cash on hand that you have to work with at the start of a given period. For a monthly projection, this is the cash balance available at the start of a month.
• Revenue: Depending on the type of business, revenue may include estimated sales figures, tax refunds or grants, loan payments received or incoming fees. The revenue section covers the total sources of cash for each month.
• Expenses: Cash outflows may include your salary and other payroll costs, business loan payments, rent, asset purchases, and other expenditures.
• Net Cash Flow: The closing cash balance, which reveals whether you have excess funds or a deficit.

Keep in mind that while many costs are recurring, you also need to consider one-time costs. Additionally, you should plan for seasonal changes that could impact business performance, and upcoming promotional events that may boost sales. Depending on the size and complexity of your business, you may want to delegate the responsibility of creating a cash flow forecast to an accountant. However, small businesses can save time and money with a simple cash flow projections template.

A More Collaborative Cash Flow Statement Template in Smartsheet

Using a template is essential to helping you get started managing your organization's financials quickly. But, creating and managing your cash flow statement may require multiple stakeholders to weigh in and make updates. That’s why it’s important to find a template with more advanced functionality like notifications and reminders and enhanced collaboration features to ensure everyone is kept in the loop. One such template is the cash flow statement template in Smartsheet.

A Smartsheet template can improve how your team tracks and reports on cash flow - use row hierarchy to sum line items automatically, checkboxes to track stakeholder approval, and attachments to store item details directly to the rows in your sheet. Easily create reports to roll up annual, quarterly, or monthly cash flow details so you’ll always have a real-time view of the financial health of your business.

See how easy it is to track and manage your cash flow statement with a template in Smartsheet.

Create a Cash Flow Statement in Smartsheet

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Home > Finance > Accounting

What Is a Cash Flow Statement?

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A cash flow statement is a crucial financial document that details all your sources of cash over a given period of time. It also breaks down where you've spent that money so you can see if your business is making more money than it spends.

Your cash flow statement is one of your business’s most important financial statements. Along with your profit and loss statement and balance sheet, it shows whether your business is on the path to success, and if not, how you can get back on track.

Let's explore what information a cash flow statement includes, how you can create one, and why tracking cash flow should be at the very top of your accounting to-do list. 

If you're searching for accounting software that's user-friendly, full of smart features, and scales with your business, Quickbooks is a great option.

What information is on a cash flow statement?

Cash flow statements sound pretty basic. First, they list all of your business's sources of cash, including sales and investments. Then they list everything you spend money on, such as employee salaries, debt payments, and equipment maintenance.

But since this is accounting we're talking about, creating a cash flow statement isn't quite as simple as it sounds. (Don't worry—we're 100% confident you can figure it out with a little help.)

Cash flow statements split your inflow and outflow of cash into three main categories:

• Cash flow from operating activities
• Cash flow from investing activities
• Cash flow from financing activities

Cash flow from operating activities means all cash that comes from or goes into your business’s daily operations. You can also think of cash from operating activities as cash related to revenue , so any money you spend or make on a product, plus any wages you pay workers who help make that product, falls under this category. So do income taxes, rent payments, interest rates, and any other cash flow that impacts how much money your business earns in daily profit.

Cash flow from investing activities means any cash earned or lost on activities like buying or selling an asset—say, a piece of property or equipment. Unlike operating activities, which include daily, short-term gains and expenses, investing activities are all about the long term. Money from assets like equipment or long-term investments falls under this category. These types of assets are also called non-current assets .

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The investing activities section also tells you your capital expenditures (sometimes styled capex, CapEx, or CAPEX). Capital expenditures are the money you use to reinvest in your physical assets—things like upgrading your bakery’s refrigerators or even building a whole new manufacturing plant. These kinds of expenses are considered investments in your company’s future, not a typical expenditure.

Cash flow from financing activities means money gained or spent financing your business. This includes shareholders’ equity, the amount of money investors have put into your company via loans or stock, and any other money flowing between you and your creditors.

Looking at a cash flow statement will tell you if you have negative cash flow or positive cash flow . If the former, you’re losing more money than you’re gaining, which could mean it’s time to cut costs and figure out how to up your revenue. If the latter, you’re in a good position to expand and invest in your company’s future.

What is free cash flow?

Cash flow statements give you and your potential investors a lot of crucial information, but one of the most important is free cash flow. Free cash flow, or FCF, is the money remaining when you subtract your capital expenditures from your operating cash flow.

A high FCF usually means your company is growing, so investors can buy stock at a lower cost while expecting their investment’s value to increase soon. Meanwhile, a low FCF tells investors your company isn’t doing well, so your shareholders’ equity isn’t likely to increase anytime soon.

What are the main types of cash flow statements?

There are two different types of cash flow statements: direct and indirect. The main difference between the two is how they tally up your cash gains and losses from operating activities.

Indirect cash flow statements are the more common type of cash flow statement. They start the operating activities section with your company’s net income , or the money you have after deducting expenses. (Hint: find your net income using a profit and loss statement , which is also called an income statement.)

From the net income, you adjust for non-cash items that still impact your bottom line, like depreciation and amortization.

Why do most businesses use indirect cash flow statements? Because non-cash aspects of your business’s finances impact the money you make from daily operations. Incorporating those non-cash assets into your cash flow statements gives you a better picture of how well you’re really doing financially.

In contrast, direct cash flow statements leave out the non-cash aspects of your cash flow from operations. These statements don’t start out with the net income—instead, they simply show how much you earn and how much you spend by listing every cash payment and receipt over a given time period.

If you read that and think, “Yikes, listing every cash payment and receipt on one document sounds super time-consuming and not all that helpful,” you’re right. In general, direct cash flow statements take too much time for the average small-business owner to prepare. Plus, they lack the big-picture accuracy of indirect cash flow statements.

How do you create a cash flow statement?

You don't need to draw up a cash flow statement entirely by hand—generations of accountants have perfected the process of calculating cash flow, so you can simply download a template and plug in your own numbers.

If you don't have accounting software, you can find a cash flow statement template on Microsoft Office. Its 12-month cash flow template for Excel will set you up with the basics.

Alternatively, turn the task over to an accountant. They’re paid to deal with the kinds of complexities that cash flow statements demand.

Or you can look for accounting or bookkeeping software that draws up reports for you. Either way, you won’t have to worry about calculating your own capex or FCF. A spreadsheet formula, accountant, or bookkeeping software program can do it for you.

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The takeaway

Cash flow statements can be complicated, so it’s okay to be intimidated if you’ve never prepared one before. But since they show exactly how much cash you have at a given moment, cash flow statements are the one financial document you can’t do without. Put one together the next time you want to see where your cash is going, where it’s coming from, and how you want to spend or save it.

Want help preparing a cash flow statement? Finding accounting software for your small business can help streamline your financial statements.

Related reading

• The Best Tools for Creating a Financial Statement
• How to Read a Financial Statement
• What Are Cash Flow Loans and What Options Are Available for Small Businesses?
• Why Cash Flow Is Important for Your Small Businesses

Cash flow FAQs

A cash flow statement is a crucial financial document that lists both your business's sources of cash and your business's expenses over a given time period. A cash flow statement shows if you're earning more money than you're spending. Basically, the document it gives you (and your investors) key insights into whether or not your business is actually profitable.

A cash flow statement is the best way to see how much money you're making and losing over any given time period—anywhere from two weeks to a month, a year, or five years. Looking over a cash flow statement is one of the best ways to find areas to cut back so you can maximize your business's profits. It can also show you which aspects of your business are bringing in the most money so you can invest in those areas while cutting back in others. 

Cash flow statements are important, but they're just one piece in the puzzle of your business's finances. To get a clear snapshot of how your business is really doing, you should be generating cash flow statements, profit and loss statements, and balance sheets on a regular basis. 

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Cash Flow Statement Template

The Cash Flow Statement , or Statement of Cash Flows , summarizes a company's inflow and outflow of cash, meaning where a business's money came from (cash receipts) and where it went (cash paid). By "cash" we mean both physical currency and money in a checking account. The cash flow statement is a standard financial statement used along with the balance sheet and income statement . The statement usually breaks down the cash flow into three categories including Operating , Investing and Financing activities. A simplified and less formal statement might only show cash in and cash out along with the beginning and ending cash for each period.

To perform a cash flow analysis , you can compare the cash flow statement over multiple months or years. You can also use the cash flow analysis to prepare an estimate or plan for future cash flows (i.e. a cash flow budget ). This is important because cash flow is about timing - making sure you have money on hand when you need it to pay expenses, buy inventory and other assets, and pay your employees.

A cash flow analysis is not the same as the business budget or profit and loss projection which are based on the Income Statement. However, for a small uncomplicated business operating mainly with cash instead of credit accounts, there may seem to be little difference.

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"No installation, no macros - just a simple spreadsheet" - by Jon Wittwer

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Description.

The spreadsheet contains two worksheets for year-to-year and month-to-month cash flow analysis or cash flow projections.

Cash Flow Statement Essentials

Operating activities.

Operating activities make up the day-to-day business, like selling products, purchasing inventory, paying wages, and paying operating expenses. Perhaps the most important line of the cash flow statement is the Net Cash Flow from Operations . This section of the statement is associated with the Current Assets and Current Liabilities sections of the Balance Sheet, as well as the Revenue and Expenses section of the Income Statement .

Investing Activities

Investing activities include buying and selling assets like property and equipment, lending money to others and collecting the principal, and buying/selling investment securities. This section of the statement is associated with the Long-Term Assets section of the balance sheet .

Financing Activities

Financing activities include borrowing from creditors and repaying loans, issuing and repurchasing stock, and collecting money from owners/investors, and payment of cash dividends. This section of the statement is associated with the Long-Term Liabilities and Owners'/Stockholders' Equity from the Balance Sheet.

I'm not going to try to explain how to prepare or analyze the cash flow statement other than to say that if you have the records of all the cash transactions, then the preparation can be done using the simple method of categorizing the receipts and payments into the three categories listed above. The indirect method can be used to create the statement of cash flows from the information in the balance sheet and income statement, but I'll leave that explanation for the textbooks. For more information, see the references below.

References:

• Financial Accounting: Reporting and Analysis by M.A. Diamond, E. K. Slice, and J.D. Slice., 2000.
• Cash Flow Statement at wikipedia.org

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Related templates.

Financial Statements

Pro Forma Financial Statements (with Templates and Examples)

Bryce Warnes

Reviewed by

Janet Berry-Johnson, CPA

April 21, 2022

This article is Tax Professional approved

Pro forma definition

According to Merriam-Webster , “pro forma” means:

• Made or carried out in a perfunctory manner or as a formality
• Based on financial assumptions or projections

I am the text that will be copied.

Pro forma is actually a Latin term meaning “for form” (or today we might say “for the sake of form, as a matter of form”).

When it comes to accounting, pro forma statements are financial reports for your business based on hypothetical scenarios. They’re a way for you to test out situations you think may happen in the future to help you make business decisions.

There are three major pro forma statements:

• Pro forma income statements
• Pro forma balance sheets
• Pro forma cash flow statements

Pro forma statements look like regular statements, except they’re based on what ifs, not real financial results. As in, “What if my business got a $50,000 loan next year?” Your pro forma statements for that scenario would show what your income, account balances, and cash flow would look like with a $50,000 loan.

Since pro forma statements deal with potential outcomes, they’re not considered GAAP compliant . This is because GAAP compliant reports must be based on historical information.

Pro forma statements don’t need to meet the strictest accounting standards , but must be clearly marked as “pro forma” and can’t be used for things like filing taxes. Using pro forma statements that aren’t marked as such to misrepresent your business to investors, the IRS, or financial institutions can be penalized by the Securities and Exchange Commission).

However, pro forma statements are still extremely useful. They can help you make a business plan, create a financial forecast, and even get funding from potential investors or lenders.

Different but related: you can send clients pro forma invoices to let them know how much their order would be if they placed it today.

Why create pro forma statements?

Creating pro forma statements for future scenarios can help you:

• Get financed, by showing lenders or investors how you would use their money to sustainably grow your business.
• Plan for the future, by considering best, worst, and most likely case scenarios in detail.
• Anticipate changes that may affect your business as it grows, such as entering a new tax bracket.

For these purposes, pro forma statements are typically created as a part of a financial forecast in financial accounting. Big corporations who have in-house accountants use pro forma statements for financial modeling and forecasting different scenarios.

Pro forma statements vs. budgets

It may be tempting to think of a pro forma statement as the same as a business budget . After all, you create both in anticipation of the future. And both help you plan how you’ll use your money. But budgets and pro forma statements are two distinct financial tools.

Think of it this way: A pro forma statement is a prediction, and a budget is a plan. Your budget may be based on the financial information of your pro forma statements—after all, it makes sense to make plans based on your predictions.

For example: Your income this year is $37,000. According to your pro forma annual income statement, your financial projections show it will be $44,000 next year. So, when you create next year’s budget, you can include that extra $7,000—maybe spending $4,000 over the course of the year to pay down the principal on a loan , while adding $3,000 to savings.

Types of pro forma statement

There are four main types of pro forma statements. While they all fall into the same categories—income statement, balance sheet, and cash flow statement—they differ based on the purpose of the financial forecast.

1. Full-year pro forma projection

This type of pro forma projection takes into account all of your financials for the fiscal year up until the present time, then adds projected outcomes for the remainder of the year. That can help you show investors or partners what business finances could look like by the end of the fiscal year.

2. Financing or investment pro forma projection

You may be courting investors or trying to convince your business partners of the value of a capital investment or additional financing. In that case, you can use a financing pro forma projection to make your case. It takes into account an injection of cash from an outside source—plus any interest payments you may need to make—and shows how it will affect your business’s financial position.

3. Historical with acquisition pro forma projection

This type of pro forma projection looks at the past financial statements of your business, plus the past financial statements of a business you want to buy . Then it merges them to show what your financials would have looked like if you made a business combination (or merger) earlier. You can use this scenario as a model of what may happen in the future if you buy the other business and restructure now.

4. Risk analysis pro forma projection

Looking at both best case and worst case scenarios helps you make financial decisions based on challenges you may face in the future. For instance, what happens if your main vendor raises their prices like they did last year? Or how will that proposed transaction of buying new equipment impact you long term? Risk analysis lets you take the future for a test ride, and try out different outcomes.

Pro forma templates

To create a pro forma statement, you can use the same template you’d use for a normal financial statement. You may want to use Bench’s free templates:

• Income statement
• Balance sheet
• Cash flow statement

How to create pro forma statements

The sample pro forma statements below may look different from the statements you create, depending on what your template looks like. But generally, these are the steps you need to take to create them—and the info your pro forma statements should include.

Creating a pro forma income statement

There are five steps to creating a pro forma income statement:

• Set a goal for sales in the period you’re looking at. Let’s say you want to increase your income by $18,000 over the course of one year.
• Set a production schedule that will let you reach your goal, and map it out over the time period you’re covering. In this case, you’ll want to earn an additional $1,500 income every month, for 12 months.
• Plan how you’ll match your production schedule. You could do this by growing your number of sales a fixed amount every month, or gradually increasing the amount of sales you make per month. It’s up to you—trust your experience as a business owner.
• It’s time for the “loss” part of “ Profit and Loss .” Calculate the cost of goods sold for each month in your projection. Then, deduct it from your sales. Deduct any other operating expenses you have, as well.
• Prepare your pro forma income statement using data you’ve compiled in the prior four steps.

One note: your pro forma statements will be much more accurate if your bookkeeping is up to date. That way, when you project future periods, you’re basing it off the reality of your business today.

How Bench can help

To predict the future, you first need to understand the past. With Bench, you get a crystal clear image of your financial history so you can focus on planning your future. We’re America’s largest bookkeeping service helping thousands of business owners better understand the financial health of their operations so they can keep focused on growth and planning. When it comes time to create a pro forma statement, you have reliable numbers and reports to get started. We may not be a crystal ball, but we’re the next best thing. Learn more .

Example pro forma income statement:

Rosalia’s Reliable Recordings

Creating a pro forma cash flow statement

You create a pro forma cash flow statement much the same way you’d create a normal cash flow statement. That means taking info from the income statement, then using the cash flow statement format to plot out where your money is going, and what you’ll have on hand at any one time. This pro forma statement can be part of a larger cash flow forecast used for decision making.

Your projected cash flow can give you a few different insights. If it’s negative, it means you won’t have enough cash on-hand to run your business, according to your current trajectory. You’ll have to make plans to borrow money and pay it off.

On the other hand, if net cash flow is positive, you can plan on having enough extra cash on hand to pay off loans, or save for a big investment.

Example pro forma cash flow statement

Mickie’s Murakami Museum

Creating a pro forma balance sheet

By drawing on info from the income statement and the cash flow statement, you can create pro forma balance sheets. However, you’ll also need previous balance sheets to make this useful—so you can see how your business got from “Balance A” to “Balance B.”

The balance sheet will project changes in your business accounts over time. So you can plan where to move money, when.

Example pro forma balance sheet

Daily Dumpling Deliveries

Once you’ve created your pro forma income statements, and cast your eyes forward to the future of your business, you can start planning how you’ll spend your money. It’s time to create a small business budget .

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• Cash Flow From Financing Activities...

Cash Flow From Financing Activities: Definition, Formula & Examples

Table of Content

Key takeaways.

• The cash flow statement comprises 3 important sections – cash flow from operations, investing, and financing activities.
• Cash flow from financing activities (CFF) encompasses crucial financial transactions related to debt repayments, issuing stocks, and dividend payments. 
• Cash from investing activities means adopting cash for long-term usage like buying or selling permanent assets such as land, machinery, or plants.

Introduction

The proper management of your company’s financial health involves the regular monitoring of three major financial indicators, and these are the balance sheet, income statement, and cash flow statement. This helps in knowing the company’s financial performance, managerial skills, and scalability and is therefore required for the investor, the management, the shareholders, and the analyst to make a well-informed decision.

A cash flow statement provides substantial information on the company’s financial health and comprises three important sections:

• Cash Flow from Operations (CFO)
• Cash Flow from Investing (CFI)
• Cash Flow from Financing Activities (CFF)

In this blog, we take a deep dive into understanding the cash flow from financing activities with some real-life examples and how advanced cash management software enables us to optimize cash flow. 

What Is Cash Flow From Financing Activities?

Cash flow from financing activities (CFF) gives a picture of how a company raises and spends money through the intermediates of issuing stocks, borrowing, debt repayment, and paying dividends. A vital component of the cash flow statement it helps assess a company’s financial stability and growth tactics.

CFF provides insights into a company’s financial strength and how well a company’s capital structure is managed.

What is Cash Flow in Financial Statements?

The cash flow statement is a pivotal financial statement that provides a comprehensive overview of a company’s cash inflows and outflows during a specified period. It is a key indicator of a company’s liquidity and cash positions and provides valuable insights into a company’s operational efficiency and financial health. The cash flow statement consists of three sections:

Cash flow from operations (CFO)

Cash flow from operations (CFO) showcases the cash inflows and outflows from an enterprise’s daily activities and operations. It includes sales income, which includes both cash and credit payments. It also accounts for an organization’s operational expenses, such as wages, account payables, vendor bills as well costs like depreciation.

Cash flow from investing (CFI)

Cash flow from investing (CFI) shows a company’s purchases and sales of capital assets. It reports the aggregate change in the business cash position as a result of gains and losses from investments in items like plant and equipment. These are considered long-term business investments. 

Cash flow from financing activities (CFF)

Cash flow from financing activities (CFF) provides an overview related to the cash exchanges between a company and its stakeholders, such as investors and creditors. It includes debt, equity, and dividends, and showcases the overall movement of funds for running the business.

Capital Funding: Debt vs. Equity

CFF depicts how a firm raises money to ensure seamless operation or to scale up. Organizations raise funds either through debt or equity. If an organization plans to borrow money, they do so by securing loans as well as by selling bonds. In both cases, they have to pay interest to their creditors as well as bondholders. 

When a company opts for an equity route, it issues stocks to investors, who now become shareholders. A cost associated with equity is dividend payments, which companies might opt to pay their shareholders.

Cash Flow from Financing Activities Formula

The cash flow from financing activities formula is the sum of all cash inflows and outflows. This includes stock repurchases, dividend payments, debt issuance, and debt repayment. In this formula, cash outflows are negative numbers and are represented within parentheses.

Cash Flow from Financing = Debt Issuances + Equity Issuances + (Share Buybacks) + (Debt Repayment) + (Dividends)

In the CFF formula, debt and equity issuances are shown as positive cash inflows since the business is raising capital (i.e., cash proceeds). In contrast, share buybacks, debt repayments, and dividends are represented within parentheses to signify that the item is a cash outflow. 

• Debt Issuances → Cash Inflow
• Equity Issuance → Cash Inflow
• Share Buybacks → Cash Outflow
• Debt Repayment → Cash Outflow
• Dividends → Cash Outflow

What are Investing Activities in Cash Flow?

Cash from investing activities denotes utilizing the cash for long-term activities involving the purchase or sale of fixed assets, business acquisitions, and mergers, and investing in marketable securities. It showcases the amount of cash a company has raised or spent via investments in a particular period.

Any moderation in the cash position of a company that involves fixed assets, investments in securities, mergers, and acquisitions would be accounted for under cash from investing activities. 

For example, if a business owner invests in a new factory building to expand its operations, that purchase would be considered a cash outflow from investing activities. Similarly, if he/she sells some old machinery the company no longer needs, the cash received from the sale would be a cash inflow from investing activities.

How to calculate cash from investing activities formula?

While there is no universal formula to calculate cash flow from investing activities, the formula that is generally accepted across the globe is: 

Cash flow from investing activities = CapEx/purchase of non-current assets + marketable securities + business acquisitions – divestitures (sale of investments).

Real-World Cash Flow from Financing Activities Example

Companies disclose cash flow from financing activities in their annual financial reports to shareholders. For instance, in the fiscal year 2023, Peloton (the fitness tech giant) reported a net cash flow of -$305.4 million, with cash flow from financing activities amounting to $76.8 million. The components of its cash flow form financing activities are listed in the table below.

Here, we can see CFF for Peloton for 2023 involves more cash inflows related to proceeds from employee stock purchases and exercise of stock option. The cash outflow involved repayment of term loan and finance leases. As cash inflow exceeded cash outflow the CFF was positive for Peloton in 2023. 

How HighRadius Cash Management Software can Streamline Cash Flow in Financial Statements?

Effective cash flow management encompasses more than a simple deduction from the inflow and outflow calculations. Developing efficient cash management is critical to growing healthy cash flow for any business. These approaches not only fortify the business during adversity but also improve cash visibility . 

With HighRadius Cash Management Software , you can boost cash flow by eliminating manual processes, enhancing productivity, and reducing errors while keeping a tab on cash positions in real time. Additionally, you get:

• Complete cash visibility and real-time bank data access with integrations with all major banks .
• Easy navigation between dashboards, cash positions, and financial instruments with data auto-filling seamlessly.
• Reduced reconciliation delays and better decision-making with automated cash-to-bank reconciliation. 
• Streamlined debt and deal tracking through integrated debt and investment cash flows.

The impact? You experience

• 100% automated bank integration You can leverage out-of-the-box support for standard banking formats used by all major banks (BofA, Citi, ING, Chase, HSBC, etc.).
• 70% increase in cash management productivity Your team can focus better on supercharging financial performance when they don’t have to deal with error-prone, manual processes.

1) How to calculate dividends paid in cash flow statements?

To calculate dividends paid in cash flow statements, subtract the net change in retained earnings from the annual net income. This formula reflects the portion of profits distributed to shareholders after accounting for changes in retained earnings, representing dividends paid out during the period.

2) Where do dividends go in the cash flow statement?

Dividends paid are typically categorized under financing activities in the cash flow statement. This section outlines the cash flows related to the company’s financing activities, including dividends distributed to shareholders as a return on their investment in the business.

3) Is paying dividends a financing activity?

Yes, paying dividends is considered a financing activity. It involves the distribution of a company’s earnings to shareholders as a return on their investment in the company, which falls under the category of financing activities in the cash flow statement.

4) What are some examples of cash outflow from financial activities?

Cash outflows can be included in financial activities such as repayment of loans, where the company returns borrowed funds with interest to creditors, stock buybacks, where shares that the company buys from investors, and dividend payments where an organization pays its shareholders.

5) What are some examples of cash inflows from financing activities?

Some examples of cash inflows from financing activities are stock issuance, borrowings, and other financing arrangements. For example, company revenue may be achieved through issuing bonds, obtaining loans from banks or receiving cash in exchange for equity participation in the company.

6) What is positive and negative CFF?

Positive cash flow from financing activities indicates a net increase in cash resulting from financing activities, such as raising capital or obtaining loans. Negative CFF indicates a net decrease in cash due to financing activities, like repaying debt or buying back shares.

Related Resources

How AI Can Revolutionize Cash Forecasting in 2024

Direct Cash Flow Forecasting And Indirect Cash Flow Forecasting: What Suits Your Business Better?

What Is a Consignment Agreement And How Does It Work?

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HighRadius Corporation 2107 CityWest Blvd, Suite 1100, Houston, TX 77042

We have seen financial services costs decline by $2.5M while the volume, quality, and productivity increase.

Colleen Zdrojewski

Trusted By 800+ Global Businesses