On this page
- What is a cash flow statement?
- Operating, investing, financing: how are cash flows classified?
- Worked example: direct method
- How to read the table
- Direct or indirect method: what is the difference?
- The same operating cash flow, indirect method
- Common mistakes when preparing a cash flow statement
- How Financist handles it
- Short glossary
- Frequently asked questions
What is a cash flow statement?
A cash flow statement records actual money movements: what arrived in bank accounts and the till, and what was paid out. The core identity is simple: closing cash = opening cash + receipts − payments.
The key difference from the profit and loss statement (income statement) is timing. The P&L recognises a sale when it happens, even if the customer has not paid yet. The cash flow statement records only the moment money actually moves. That is why a profitable company can run out of cash, and a loss-making one can temporarily hold plenty. For the full comparison see cash flow, P&L and balance sheet.
Operating, investing, financing: how are cash flows classified?
To make the statement readable, cash movements are split into three groups by purpose.
- Operating activities: day-to-day business. Customer receipts, supplier payments, salaries, rent, taxes. This line shows whether the business generates cash on its own.
- Investing activities: buying and selling long-term assets such as equipment, vehicles or property.
- Financing activities: raising and returning capital. Loans and repayments, owner contributions and withdrawals, dividends.
Transfers between your own accounts belong to none of the groups. They do not change total cash, so they are shown separately. Loan interest is classified as operating or financing depending on the practice you follow; pick one approach and stay consistent.
Worked example: direct method
A small service business over one month, amounts in EUR thousand. The numbers are invented for illustration.
| Line | EUR thousand |
|---|---|
| Opening cash | 40 |
| Receipts from customers | +120 |
| Payments to suppliers | −55 |
| Salaries | −30 |
| Rent and utilities | −10 |
| Taxes and levies | −5 |
| Operating cash flow | +20 |
| Equipment purchase | −18 |
| Sale of old equipment | +3 |
| Investing cash flow | −15 |
| Loan received | +25 |
| Loan principal repaid | −8 |
| Owner withdrawals | −10 |
| Financing cash flow | +7 |
| Net change in cash | +12 |
| Closing cash | 52 |
How to read the table
Operating: 120 − 55 − 30 − 10 − 5 = 20. Investing: −18 + 3 = −15. Financing: 25 − 8 − 10 = +7. Total 20 − 15 + 7 = +12, and 40 + 12 = 52.
The business earned 20 from operations, spent 15 on equipment, and the loan net of owner withdrawals added 7. A steadily positive operating line is healthy. A long negative stretch covered only by new loans deserves attention.
Direct or indirect method: what is the difference?
The direct method shows actual receipts and payments by group: cash from customers, to suppliers, to staff. The example above uses it. It is intuitive and handy for management because you see immediately where money came from and went.
The indirect method starts from net profit and adjusts it: it adds back non-cash costs such as depreciation and accounts for changes in receivables, payables and inventory. It explains why profit differs from cash. Operating cash flow must come out the same under both methods, and the investing and financing sections are identical.
The same operating cash flow, indirect method
Same month: from an illustrative net profit of 14 we arrive at the same 20.
| Line | EUR thousand |
|---|---|
| Net profit | 14 |
| Depreciation (non-cash cost) | +4 |
| Increase in receivables | −6 |
| Decrease in inventory | +3 |
| Increase in payables | +5 |
| Operating cash flow | 20 |
The logic of each line: customers owe us 6 more, so cash has not arrived yet and we subtract it. Inventory went down, meaning stock bought earlier was sold without new payments, so we add 3. We owe suppliers 5 more, so cash has not left yet and we add it. Check: 14 + 4 − 6 + 3 + 5 = 20.
Common mistakes when preparing a cash flow statement
- Mixing it up with the P&L: recording a sale on the shipment date instead of the payment date.
- Counting transfers between your own accounts as income and expense, which inflates turnover and distorts the result.
- Treating a loan received as revenue. A loan is not income.
- Mixing personal and business money. Owner withdrawals should be a separate line.
- Not reconciling closing cash with bank statements and the cash box.
- Preparing it once a year. Management needs a monthly statement and a forecast for the coming weeks.
- Never comparing actuals with a plan. A statement without a forecast only answers “what happened”.
How Financist handles it
In Financist the cash flow statement is built automatically from actual payments, so it follows the direct method. Rows are opening balance, receipts and payments by category, internal transfers (shown separately), net balance and closing balance. You can group by category, account, counterparty or project, view days, weeks, months, quarters or years, and switch on plan vs actual. Categories can carry an operations type such as operating, financing or investing, and any report exports to CSV. More on the cash flow report. For the coming weeks, use a payment calendar.
Short glossary
- Receipt
- Money that arrived in an account or the till: a customer payment, a loan received, an owner contribution.
- Payment
- Money that left an account or the till: a supplier payment, salary, tax or loan repayment.
- Net cash flow
- Receipts minus payments for the period. Positive net flow raises the balance, negative lowers it.
- Cash gap
- A period when accounts hold too little cash for required payments, even if the business is profitable overall.
- Depreciation
- Gradual allocation of an asset’s cost to expenses. It is a cost in the P&L but not a cash movement.
Frequently asked questions
How is a cash flow statement different from a bank statement?
A bank statement shows movements on one account with no context. A cash flow statement combines all accounts and the till, sorts payments by category and activity, and removes internal transfers. It shows what the money was spent on, not only how much is left.
Which method should a small business use?
Usually the direct method. It is built from real payments and is easy for non-accountants to read. The indirect method helps when you need to explain the gap between profit and cash. If payments are already tracked by category, the direct view comes almost for free.
Can cash flow be positive while the business makes a loss?
Yes. Customers may have paid in advance, you may have taken a loan or delayed supplier payments. Cash grows although the P&L shows a loss. This is why the cash flow statement is read together with the P&L and the balance sheet.
How often should I prepare it?
Monthly for management, and weekly if receipts are irregular. Add a forecast for the next weeks and a plan vs actual comparison. A once-a-year statement prepared only for reporting arrives too late to guide practical decisions.
Do I need a cash flow statement if I already have a P&L?
Yes. The P&L answers whether the business is profitable; the cash flow statement answers whether there is enough cash to meet obligations. They complement each other and, together with the balance sheet, give the full financial picture.