What Is a Cash Flow Statement? Example, Template & How to Read It
Plain-English guide to the cash flow statement with a worked example, free template, and the simple formulas to calculate operating, investing, and financing cash flow.
Quick Answer
A cash flow statement is a financial report that shows the actual cash moving in and out of a business over a period, organized into three sections: operating activities (day-to-day business), investing activities (buying or selling assets), and financing activities (loans, owner contributions, dividends). The bottom line — net change in cash — must match the change in the bank balance for the period.
A cash flow statement is the only financial report that shows what actually happened to the money in your bank account. Profit can be a story; cash flow is the receipt.
Table of contents
What Is a Cash Flow Statement?
A cash flow statement (also called a statement of cash flows) is one of the three core financial statements, alongside the income statement and balance sheet. It reports the actual cash a business received and paid out during a period — typically a month, quarter, or year. Unlike the income statement, which records revenue when earned and expenses when incurred, the cash flow statement only tracks money that physically moved.
Public companies are required to publish it under GAAP (US) and IFRS (international). Small businesses don't have to file one, but lenders, investors, and the IRS often ask for it — and reading your own is the fastest way to spot trouble before it hits payroll.
The Three Sections Explained
1. Operating Activities — cash from running the business: customer payments received, payroll, rent, supplier payments, taxes. This is the engine. Healthy businesses generate positive operating cash flow consistently.
2. Investing Activities — cash used to buy or sell long-term assets: equipment, vehicles, software licenses, investments. Usually negative for growing businesses.
3. Financing Activities — cash from loans, lines of credit, owner contributions, owner draws, or dividends. Shows how the business is funded outside of operations.
Add the three together and you get the net change in cash. Add that to the beginning cash balance and you get the ending cash balance — which must match your bank statement.
Cash Flow Statement Example
Here's a simple monthly statement of cash flows for a fictional consulting firm, Acme Studio:
How to Calculate Cash Flow (Step by Step)
The fastest way for a small business is the indirect method: start with net income, then adjust for non-cash items and changes in working capital.
Operating Cash Flow = Net Income + Depreciation & Amortization − Increase in AR + Increase in AP − Increase in Inventory
Investing and financing sections are direct — just list cash spent or received. The whole exercise takes 30 minutes a month with the right template.
Direct vs Indirect Method
The direct method lists actual cash receipts and payments by category (cash from customers, cash to suppliers, etc.). It's more intuitive but requires detailed bookkeeping.
The indirect method starts with net income from the P&L and adjusts. It's faster and uses data you already have. The IRS and most lenders accept either, but indirect is the standard for small businesses.
Free Cash Flow Statement Template
A working template only needs five rows per section: beginning balance, line-item adjustments, subtotal, and a single ending cash line. A Google Sheets or Excel version with the indirect-method formulas already wired up takes about an hour to build once and a few minutes a month to update.
The structure below works for any small service or product business — copy it into a spreadsheet and replace the example numbers with your own.
How to Read a Cash Flow Statement
Read it in this order: (1) Operating cash flow — should be positive and roughly track net income; (2) Investing — negative is normal if you're growing; (3) Financing — heavy borrowing to cover operations is a red flag; (4) Net change in cash vs your bank — they must reconcile.
The single most important signal: profitable on paper but negative operating cash flow. That almost always means customers are paying too slowly or inventory is tying up cash.
Best Ways to Get Started
- →
Use the indirect method
Faster, uses data you already have, accepted by lenders and the IRS.
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Build the template once
A 5-row-per-section spreadsheet you reuse every month beats rebuilding it.
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Run it monthly, not yearly
Monthly cadence catches cash leaks while you can still fix them.
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Pair it with a 13-week forecast
Historical cash flow plus a forward-looking forecast is the small business finance toolkit.
Step-by-Step Plan
- 01
Pull net income from the P&L
Use the same period (month, quarter, year) you're reporting cash flow for.
- 02
Add back non-cash expenses
Depreciation and amortization reduce profit but don't move cash — add them back.
- 03
Adjust for changes in working capital
Subtract increases in AR and inventory; add increases in AP. These tie profit to actual cash.
- 04
List investing activities
Cash spent on equipment, vehicles, software, or investments goes here as negatives. Sales of assets are positives.
- 05
List financing activities
Loan draws and owner contributions are positives. Loan payments, owner draws, and dividends are negatives.
- 06
Sum the three sections
That total is the net change in cash for the period.
- 07
Reconcile to your bank
Beginning cash + net change should equal the ending bank balance. If it doesn't, find the missing transaction.
Cash Flow Statement Example — Acme Studio (Monthly)
| Section | Line Item | Amount (USD) |
|---|---|---|
| Operating | Net income | $8,400 |
| Operating | + Depreciation | $600 |
| Operating | − Increase in accounts receivable | ($2,100) |
| Operating | + Increase in accounts payable | $900 |
| Operating | Net cash from operating activities | $7,800 |
| Investing | − Purchase of new laptop | ($1,800) |
| Investing | Net cash from investing activities | ($1,800) |
| Financing | + Owner contribution | $2,000 |
| Financing | − Loan principal payment | ($500) |
| Financing | Net cash from financing activities | $1,500 |
| Total | Net change in cash | $7,500 |
| Total | Beginning cash balance | $12,400 |
| Total | Ending cash balance | $19,900 |
Mistakes to Avoid
- ✗Confusing net income with cash flow — they almost never match.
- ✗Forgetting to add back depreciation on the indirect method.
- ✗Leaving owner draws out of financing activities.
- ✗Failing to reconcile ending cash to the bank statement.
- ✗Only running the report at year-end, after the damage is done.
Pro Tips Advanced
- ★Color-code positive numbers green and negatives red — patterns jump out fast.
- ★If operating cash flow is negative two months in a row, audit AR aging immediately.
- ★Save a snapshot every month so you can compare trends over a year.
- ★Most accounting software (QuickBooks, Xero, Wave) generates this report automatically — verify the categories rather than building from scratch.
Frequently Asked Questions
Sources
- • Publication 334: Tax Guide for Small Business — Internal Revenue Service
- • Generally Accepted Accounting Principles (GAAP) — Financial Accounting Standards Board
- • Small Business Financial Management — U.S. Small Business Administration
All articles are reviewed for factual accuracy by a credentialed accounting professional before publication.
David spent 11 years as a financial controller before joining Ledgerwise as a contributing editor. He writes about cash flow management, accounts receivable, and operational finance for owner-operated businesses.
