A cash flow statement is a financial report that tracks the movement of money into and out of a business, also known as business cash flow. It summarizes how your company earns and spends its liquid assets during a specific period. Along with your income statement and balance sheet, it is one of the most fundamental financial reports you can create for your business.
The Securities and Exchange Commission (SEC) requires publicly traded companies to release periodic cash flow statements. Investors have a right to these documents to make informed investment decisions and keep these businesses accountable.
While cash flow statements are not legally required for private businesses, understanding your cash flow picture is essential for managing financial operations, supporting growth, and communicating with lenders or investors. However, they can be an invaluable tool for monitoring your company’s short-term financial health and establishing your creditworthiness to potential lenders.
Your cash flow statement is a snapshot of your company’s ongoing financial health. It contains vital information for:
Business cash flow refers to the net amount of cash being transferred into and out of a business. This includes income from sales or services and expenses like payroll, rent, or inventory. When buying a business, understanding its cash flow tells you whether it’s generating sufficient cash to cover its operations, debts, and future investments.
A positive cash flow indicates financial health, while negative cash flow may signal instability unless tied to strategic investments.
The cash flow statement definition in business accounting includes three primary sections: operating, investing, and financing activities — these are also known as the three sections of a cash flow statement. Each represents a different way that money can flow in and out of your business.
Closely examine each of these three sections and keep an eye on the totals in the bottom line. That way, you can make adjustments if your cash flow picture is not as clear as you’d like it to be.
Operating activities represent the core functions of the business. The term for all resources that come into the firm from operating activities is cash inflow from operations. Your gross sales receipts will be listed here, as well as expenditures like:
Investing activities are transactions that involve an upfront payout of cash or borrowed funds with the expectation of a larger future return. This often consists of the purchasing or sale of assets.
The asset involved may be necessary for operations, such as equipment or office space, but such transactions are not usually part of businesses’ day-to-day procedures. Instead, a cash flow statement will include income or expenses related to these items in the investments section.
Investing activity includes transactions related to:
Financing activities involve inflows and outflows of cash related to funding your business, including debt, equity, and capital structure decisions. Yes, issuing stock is a financing activity, as are repaying loans and paying dividends. These transactions include:
Non-cash activities should also be disclosed as a footnote or addendum to the cash flow statement if they are not included in the main sections. Cash is not flowing into or out of your business with these activities, but they can substantially impact current and future profits.
Examples of non-cash disclosures include:
All of the activities listed on a cash flow statement are used to calculate your company’s overall cash flow during that period. Expenditures are subtracted from income, and the difference is displayed on the bottom line of the statement.
A negative number indicates that the cash going out has exceeded the cash coming in. Conversely, A positive number means that there has been more money flowing in than has flowed out.
Cash flow statements are a snapshot in time, meaning they do not always provide the entire picture of a company’s financial stability. For example:
It is essential to look at cash flow statement trends over time rather than in isolation. The trends from one statement to the next will give you the best information about your company’s financial situation on the whole.
Business leaders and financial managers use the cash flow statement to assess short-term liquidity, monitor financial stability, and make strategic decisions. The statement:
Reveals if daily operations generate enough cash
Shows if the business can cover debts or reinvest in growth
Helps predict future cash needs
Identifies inefficiencies in how cash is being used
Understanding these details helps a company stay agile and make informed financial plans that align with business goals.