Cash Flow Statement: A Brief Overview You Should Know

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Written By Nidhi Sharma

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A cash flow statement, also known as a statement on cash flows, is a financial document showing how money is moving in and out of your company.

Cash flow statements should be a top concern for your business. Therefore, cash flow statements will be the first financial statements that you create.

This overview will show you how to establish financial tracking and reporting that you need to create cash flow statements. It will also help you understand what's coming in, and what's going away.

What do You Understand by a Cash Flow Statement and How does it Work?

A cash flow statement, also known as a statement on cash flows, is a financial document showing how money is moving in and out of your company.

This and other financial statements may be required for common financing activities, such as securing loans or applying to invest capital.

To evaluate the financial health and provide an overview of how much money you spend, cash flow statements can be used.

Ingredient of Cash Flow Statement

To understand how cash and cash equivalents are flowing through your business, you will need to create a cash flow statement.

This is typically divided into three sections. These terms are the most commonly used, although there might be variations depending on industry or region.

These are the most common sections:

Cash Flow From Operations

This is often referred to as "cash for operating activities", and it is the first.

This includes the cash incoming from sales and contracts, as well as the outgoing payments for operating expenses such as taxes or staff costs.

Cash Flow From Investing

The investing section tracks capital expenditures, acquisitions, and divestments. Acquisitions and expenditures are both cash outflows. Divestments, on the other hand, are cash inflows.

This section is not uncommon to be dominated by cash outflow. Many thriving businesses invest more in investments than they do in cashing them out.

Financing Generates Cash Flow

This section will describe how your company funds and distributes its money. This section may contain transactions regarding equity and company debt.

This section would be used to capture dividends paid by your company to shareholders.

How to Calculate Cash Flow?

You subtract or add differences to your net income to calculate your company's cash flow based on the information in your income statement and balance sheet.

Because net income includes noncash items, adjustments are made to revenue and expenses. Credit transactions are also included. These methods are used to calculate cash flows:

Direct cash flow method: Use the beginning and ending balances of your accounts to calculate all cash receipts and cash payments. This includes cash payments to suppliers and cash received from customers.

Indirect Cash flow method: This method calculates cash flow by using net income from income statements. This method only takes into account revenue earned.

Next, adjust earnings before interest and taxes to account for any transactions that impact your net income. Then, you add transactions that do not have an impact on your cash flow such as depreciation.


Cash flow statements must always reflect changes in accounts receivable throughout each accounting period. An increase in cash flow from customers who have paid their accounts off indicates a decrease in accounts receivable.

This leads to increased net earnings. An increase in accounts receivable must be subtracted from net earnings as it is not an increase in cash.

Inventory value

A rise in inventory should be deducted from net earnings. It indicates money that your company spent if paid in cash.

Your balance sheet would reflect inventory purchased with credit as an increase in accounts payable. The increased amount is added each year to net earnings.

Why is Cash Flow so Important?

Your business can be hindered by insufficient cash flow. Past surveys have shown that cash flow is an important aspect of any business. It also matters to lenders and outside investors.

Many common financing activities will require you to present financial statements including cash flow.

Cash flow is a vital indicator of the company's financial growth. It can help you pay your bills and prove that you can operate efficiently.

These statements are often regarded as one of the most important financial statements that your company produces. You can also track cash flow to make future projections more accurate.

What is Cash Flow?

Understanding the terminology is half of the battle when it comes to financial math. There are terms such as "the cash flow of operations" and "negative cash flow." These terms can be confusing.

Cash Flow

Cash flow, also known as the money coming into and going out of your business over time, is often reported quarterly.

Because it provides a complete financial picture of your assets, liabilities, and expenses, it is more informative than profits alone.

Cash flow does not include all assets. Cash flow should only include short-term investments, which are typically bonds maturing in three months or less.

Because invested money is not always available immediately and can fluctuate with market conditions, longer-term investments should not be considered part of your company’s cash flow.

Positive Cash Flow

A positive cash flow refers to a company's cash inflows exceeding its outgoing expenses. A positive cash flow is a significant milestone for new businesses.

Negative Cash Flow

Negative cash flow means your business has transferred more money than it received during the period under review. This does not necessarily mean that your business is in danger.

If your product or service has seasonality, you may experience negative cash flow at times. If you start a new business, negative cash flow may be a possibility until you build a client base.

Net Cash Flow

Net cash flow refers to the difference between incoming and outgoing cash flow. It is also known as the change in cash holdings of your business over the period in your statement. It can be useful to track your business's cash flow over time.

Cash Flow is Free

The company's free cash flow is the amount of money that remains after all expenses have been paid and reinvested in the business, such as purchasing equipment or hiring new employees.

The cash flow statement will often include free cash flow. This is because shareholders are usually interested in the cash flow.

Cash Flow for Operating Cash

Operating cash flow refers to the amount of money that a company makes from its business activities and not from investors.

This item is essential on a cash flow statement as it provides an excellent indicator of the strength of your business.

What Other Types of Financial Statements are There?

Many financial statements are required for financing activities such as applying for loans and courting investors.

These three documents, along with a cash flow statement and a cash flow statement may be required depending on your business's nature and the financing activities that you are pursuing.

  • Balance sheet
  • Statement of income
  • Statement of shareholder equity

Which Resources are Available to Support Cash Flow Statements

It can be difficult to track your finances. These accounting resources can help you create a cash flow statement that is efficient.

Software for Accounting

Pre-configured reports are available for the top accounting software applications. If you don't have a program yet, an online template is available. Use a template to meet your reporting needs.

To manage your company's finances, accurate tracking is essential. Incorrect tracking can make it impossible to use the most sophisticated templates, income statements, or balance sheets. Accounting software that assists you in financial tracking is often very cost-effective.

Securities and Exchange Commission

Many helpful guides are published by the U.S. Securities and Exchange Commission, including the Beginner’s Guide to Financial Statements.

It will provide the information you need if you have never seen a balance sheet, or put together profit and loss statements.

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