Cash is the lifeline of every business—especially new and small businesses.
Limited or inconsistent cash flow is one of the most significant challenges that small businesses face. That’s why understanding and managing cash flow is a prerequisite for success.
To get a grasp of the cash flows going in and out of your business, you need a cash flow statement. If you’re having a hard time with financial statements, don’t worry: this guide explains the ins and outs with a free cash flow statement template to download and use.
What is a cash flow statement?
A cash flow statement is a financial statement that summarizes the inflows and outflows of cash transactions during a given period of business operations.
The purpose of a cash flow statement is to record how much cash (or cash equivalents) is entering and leaving the company. Businesses use cash flow statements to get a detailed picture of their cash position, which is essential to a company’s financial health.
Many small businesses fall into the trap of overly focusing on profit and loss, ignoring company cash flow in the process. Having a clear overview of cash flows will allow you to understand where money is coming from and how it’s spent.
Recording cash movements is easier if you use a cash flow statement template for small businesses. A cash flow statement template typically comes in spreadsheet format, pre-loaded with the necessary formulas for easy calculations.
Elements of a cash flow statement
The cash flow statement shows the three main types of cash flows:
- Operating activities
- Investing activities
- Financing activities
Operating activities
Operating activities in the cash flow statement include core business activities. This section measures the cash flow from a company’s provision of products or services. Examples of operating cash flows include sales of goods and services, salary payments, rent payments, and income tax payments.
Investing activities
Investing activities include cash flows from the acquisition and disposal of long-term assets and other investments not included in cash equivalents. These represent long-term investments in the company’s growth. For instance, purchasing or selling physical assets like real estate or vehicles, and non-physical property, like patents.
Financing activities
Cash flows related to financing activities typically represent cash from investors or banks, issuing and buying back shares, and dividend payments. Whether you’re getting a business loan, paying interest to service debt, or distributing dividends, all of these transactions fall under financing activities.
Importance of cash flow statements
Cash flow is like having enough money in your bank account to pay your bills. If you don’t have enough cash coming in, you can’t pay for things like employees, suppliers, or rent. Just like you might plan a personal budget, businesses use a cash flow statement to make plans.
If you have good cash flow, banks and investors are more likely to lend you money or invest in you. It’s like having a good credit score that makes it easier to get a loan.
How to prepare a cash flow statement
There are two core ways to prepare a cash flow statement: the direct method and the indirect method.
No matter which method you choose, only the operating activities section of your cash flow statement will be affected. The two other sections, cash from investing and financing activities, will remain the same.
Direct method
The direct method adds up all the cash inflows and outflows from operating activities. It’s based on the cash basis accounting model that recognizes revenues when cash is received and expenses when they are paid. The direct method for cash flow calculation is straightforward, but it requires tracking every cash transaction, so it might require more effort.
Pros:
- Transparent
- Easy to understand
- Uses real-time figures
Cons:
- Takes more time and effort
- Can be an issue for businesses using accrual accounting (see below)
- Businesses using this method still need to reconcile net income with cash flow from operating activities
1. Start with cash receipts
List your receipts of cash made from all customers. This doesn’t include any sales made on credit, just cash collected from sales or services.
2. Add interest or dividends received
Add any income you received from interest or earned from dividends during the accounting period.
3. Subtract cash payments made to employees or suppliers
List all cash payments you made to employees, including salaries, contract and freelance labor. This also includes any income tax you paid. Here you’ll also list any payments made to suppliers during the accounting period, including any fees or interest paid.
4. Calculate cash flow
Add the cash collected and subtract the cash payments made during the accounting period. This will give you a clear picture of the cash flow available. You can do this using the free Shopify cash flow calculator.
Based on that number, you can figure out if cash increased or decreased for the period. This is a big indicator of how well a company is doing financially, and how much cash it can generate to pay bills and invest for the future.
Indirect method
The indirect method of preparing a cash flow statement uses net income as a base and adjusts it based on non-cash expenses like depreciation and amortization.
This method is suitable for businesses using accrual accounting, where revenue is recorded when it’s earned rather than when it’s received. When using the indirect method, begin with the net income from your income statement, then make adjustments to undo the impact of accruals made during the period.
Pros:
- Easy to prepare
- Allows for reconciliation with income statement and balance sheet
- Discloses non-cash transactions
Cons:
- Lack of transparency
1. Start with net income
A cash flow statement starts with net income. Based on the income statement, it’s the profit or loss after all expenses, including taxes, have been deducted.
Net income is calculated by subtracting all operational expenses, interest payments, taxes, and other expenses from total revenue.
It’s important because it’s the basis for cash flow adjustments. Although net income is a measure of profitability, it doesn’t equal cash flow.
2. Add non-cash expenses
Non-cash expenses are adjustments made to net income to reflect the actual cash position of your business.
Depreciation and amortization are the most common non-cash expenses. Depreciation is how you spread the cost of tangible assets over their useful lives, while amortization is how you spread the cost of intangibles.
It also includes losses from the sale of assets, even though they might not have resulted in a cash outflow.
3. Subtract changes in working capital
Working capital is the difference between current assets (like cash, inventory, and receivables) and liabilities (like accounts payable and short-term debt), and may fluctuate from one period to the next.
4. Add other cash items
This step involves adjusting for other cash inflows and outflows not included in net income and working capital. These include dividends paid, interest paid, and any other cash investments or payments.
5. Calculate cash flow
The final step is to calculate the total cash flow for the period. This is done by combining the net income, adjustments for non-cash expenses, changes in working capital, and other cash items.
How to read a cash flow statement
The goal of the cash flow statement is to show the amount of cash generated and spent over a specific period of time, and it helps businesses analyze the liquidity and long-term solvency.
When you summarize all cash transactions, you can get a positive or a negative cash flow.
Look for positive cash flow
Positive cash flow means you have more money coming in than going out. This opens up opportunities for reinvesting excess of cash in business growth. However, positive cash flow doesn’t necessarily mean that your business is profitable. There are cases where the company has a negative net income, but a positive cash flow due to borrowing activities.
Investigate negative cash flow
Negative cash flow indicates that you’ve spent more cash than you’ve generated during a specific period of time.
Negative cash flow isn’t necessarily a bad thing, especially if it results from investment in future growth.
For instance, VC-funded startups often exhibit negative cash flow, or burn rate, as they work to gain market share, win customers, and generate higher long-term profits. However, if you have a negative cash flow in more than one accounting period, you should consider it a red flag for your business’s financial health.
Make cash flow statement notes
Don’t forget to annotate your cash flow statement with important and helpful information for anyone trying to read and understand it. You might include notes about important definitions, how the numbers were calculated, which currency you’re using, and if you’re showing numbers in thousands or millions. This will mitigate misinterpretation.
Cash flow statement example
Below is a hypothetical cash flow statement example that provides a comprehensive view of the cash inflows and outflows from operating, investing, and financing activities. It highlights the company’s liquidity and cash management for the year.
| Cash flow statement // Year ending December 21, 2023 | |
|---|---|
| Cash flow from operating activities | |
| Net income | $120,000 |
| Adjustments for non-cash items | |
| Depreciation and amortization | $15,000 |
| Inventory write-downs | $3,000 |
| Other | $2,000 |
| Changes in working capital | |
| Decrease in accounts receivable | $5,000 |
| Increase in inventory | ($8,000) |
| Decrease in prepaid expenses | $1,000 |
| Increase in accounts payable | $7,000 |
| Increase in accrued expenses | $4,000 |
| Increase in taxes payable | $2,000 |
| Net cash from operating activities | $151,000 |
| Cash flow from investing activities | |
| Property and equipment purchase | ($25,000) |
| Intangible assets purchase | ($10,000) |
| Income from equipment sales | $5,000 |
| Net cash from investing activities | ($30,000) |
| Cash flow from financing activities | |
| Proceeds from issuance of common stock | $50,000 |
| Long-term debt repayment | ($20,000) |
| Dividends paid | ($10,000) |
| Net cash from financing activities | $20,000 |
| Net increase in cash and cash equivalents | $141,000 |
| Cash and cash equivalents at beginning of year | $60,000 |
| Cash and cash equivalents at end of year | $201,000 |
Here are some examples notes for the hypothetical cash flow statement example above:
- Net income: This is the profit of the business after all expenses have been deducted.
- Depreciation and amortization: Non-cash expenses that reduce the value of fixed assets and intangible assets over time.
- Changes in working capital: Reflect adjustments in current assets and liabilities, impacting the company's liquidity.
- Investing activities: Involves the purchase and sale of long-term assets.
- Financing activities: Reflect changes in the capital structure of the business, such as issuing stock, borrowing, and repaying debt.
- Currency: All figures are in USD.
Cash flow statement vs. other financial statements
Financial statements are reports that summarize the financial performance of your business. A cash flow statement is one of the main types of financial statements, alongside an income statement, a balance sheet, and a profit and loss statement.
All three financial statements are different, but linked. Net income from the income statement feeds into retained earnings on the balance sheet, and it’s the starting point in the cash flow statement.
Cash flow statement vs. income statement
An income statement measures revenue, expenses, and profitability over a specific period, highlighting its profitability through net income. A cash flow statement shows the actual cash inflows and outflows over the same period, focusing on liquidity and cash management. The income statement includes non-cash items like depreciation, while the cash flow statement adjusts for these to reflect actual cash movement. The income statement measures financial performance, while the cash flow statement measures cash availability.
Cash flow statement vs. balance sheet
A company’s balance sheet includes total assets and liabilities, including money your business owes and money owed to you. Cash flow simply shows the money that came in and out of your business over a given span of time. Unlike an income statement, a balance sheet provides a detailed view of your assets and liabilities.
Cash flow statement vs. profit and loss
Cash flow statements are different from profit and loss (P&L) statements. Profit reflects revenue after subtracting all costs during a set period, such as a quarter or year. Cash flow only records cash going in and out of a company. A P&L statement is also an income statement.
Cash flow statement template
You don’t need to start from scratch when preparing a statement of cash flows. Download the free cash flow statement template and start tracking your business’s finances today.
It’s easy to use, with simple instructions, and you can customize it to suit your business’s accounting periods.
To use this template, simply follow these three steps:
1. Gather relevant documentation
To fill out the template, you need financial information like receipts, invoices, bank statements, and other documents.
2. Fill out the template
As you input your numbers, the spreadsheet’s formulas will update automatically. The template should also include the starting balance so it can be carried forward, giving you an accurate calculation of your cash flow in each period.
3. Review the cash flow statement
Your cash flow statement is ready. But what does it mean? It’s time to do some cash flow analysis.
Cash flow analysis involves reading the cash flow statement to get a better sense of your business’s cash flow management and maybe even do some cash flow forecasting (predicting future cash flows).
Keep an eye on your cash flow statement
Cash flow statements may be complex, but there are many ways you can use Shopify, a suite of small business accounting tools, and apps to simplify the process. When you prepare your cash flow statements on a regular basis, you can spot trends, maintain positive cash flow, and set yourself up for an endless amount of growth opportunities.
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Cash flow statement FAQ
What are the 3 types of cash flow statements?
- Cash flow from operating activities
- Cash flow from investing activities
- Cash flow from financing activities
How do you interpret the cash flow statement?
You interpret the cash flow statement by reading the notes and then looking for indications of positive or negative cash flow. Then investigate further what’s causing the negative or positive cash flow and see what you can learn from that.
How do you know if a cash flow statement is good?
A good cash flow statement shows positive and growing cash flow from operating activities, indicating the company generates enough cash from its main business operations. It also shows investing and financing activities—look for sound investments in long-term assets and balanced use of debt and equity financing. A good cash flow statement shows stability and predictability in cash flows, demonstrating effective cash management and a strong liquidity position.
What does a healthy cash flow statement look like?
A healthy cash flow statement shows consistent positive cash flow from operating activities. It also shows strategic investments in long-term assets and a balanced approach to financing without excessive debt. The statement also reflects efficient working capital management, maintaining sufficient cash reserves to cover short-term obligations and unexpected expenses.
What is a bad cash flow statement?
A bad cash flow statement shows continual negative cash flow from operating activities, indicating the company isn’t generating enough cash from its core operations. There may be excessive spending on investments without high returns or unsustainable financing activities, such as lots of debt or large dividend payouts. Unexplained fluctuations in cash flows and poor liquidity management and the inability to meet short-term financial obligations are also signs of a bad cash flow statement.
 - Shopify (2024))
