What Is a Cash Flow Statement, and How Does It Help in Business Planning?

A cash flow statement tracks a company’s incoming and outgoing cash, revealing financial health and operational efficiency. It helps businesses plan investments, manage liquidity, and make informed financial decisions by assessing cash flow from operations, investments, and financing activities.

By Douglas Wade, Attorney

Email | Call (800) 484-4610

Have a quick question? We answered nearly 2000 FAQs.

Table of Contents

1. What Does a Cash Flow Statement (CFS) Show?

2. The Function of the Cash Flow Statement

3. Overview of the Cash Flow Statement’s Structure

4. Operating Activity Cash Flow

5. Cash From Investment Activities

6. Cash Received from Financing Activities

7. Instructions for Making a Cash Flow Report

8. What Is the Formula For Cash Flow?

9. Problems with Cash Flow Statements

10. Financial Statements (Cash Flow, Income, and Balance Sheet)

11. How Do Indirect and Direct Cash Flow Statements Differ?

12. Is There a Clear Winner Between the Direct and Indirect Approaches to Cash Flow Statements?

13. What Does Cash and Cash Equivalents Mean?

14. An Example of How to Figure Out Cash Flow

15. Eight Arguments in Favor of Using a Cash Flow Statement

What Does a Cash Flow Statement (CFS) Show?

If you want to know how healthy and efficient a business is financially, you should look at its cash flow statement. It shows all the money coming in and going out of the organization.

As a measure of a company’s ability to meet its financial commitments and cover its operational expenditures, the CFS looks at how efficiently the business manages its cash position. The CFS is a useful supplementary tool for both the income statement and the balance sheet, the other two primary financial statements. This post will go over the development of the CFS and how to apply it to company analysis.

The Function of the Cash Flow Statement

You can see the health of a business, its revenue streams, and its expenditures in the cash flow statement. Creditors can learn more about the company’s liquidity—its ability to pay bills and run the business—from the cash flow statement (CFS), which is another name for the statement of cash flows. Investors place equal weight on the CFS as it indicates whether a business is financially stable. Consequently, the statement can help them make wiser investing choices.

Overview of the Cash Flow Statement’s Structure

The cash flow statement primarily includes:

Cash flow from investing activities
Cash flow from operating activities
Cash flow from financing activities
According to generally accepted accounting standards (GAAP), some financial reports include information about moves that don’t involve cash.

Operating Activity Cash Flow

Any money coming into or going out of a company falls under the operational operations category on the CFS. Put another way, it shows the amount of money that comes in as a result of a business’s services or products.

Some examples of these operational tasks are:

Products and services sold and the money received
Payments for interest
Taxes on income
Suppliers of production-related items and services get payments
The payment of wages and salaries to workers
Payment for rent
All additional kinds of operational costs

Because it is a commercial activity, investment companies and trading portfolios also contain proceeds from the sale of debt, equity, and loan instruments.

In most cases, cash from operations will incorporate changes in cash, accounts receivable, depreciation, inventory, and accounts payable.

Cash From Investment Activities

How a business earns and spends money on its investments are considered investing activities. This includes all payments pertaining to mergers and acquisitions (M&A), as well as the buying and selling of assets, loans to suppliers, and payments received from consumers. Investment capital is directly tied to changes in machinery, assets, and other investment-related items.

If you’re an investor, you probably know that cash is king when it comes to buying new machinery, structures, or even short-term assets like marketable securities. These are all examples of cash-out products. But for the purposes of determining cash from investments, a sale of an asset is a cash-in transaction.

Cash Received from Financing Activities

Funds received by a company or distributed to its shareholders are all part of the cash flow from financing operations. This includes funds received from investors and banks. Among these are the company’s dividends, payments for stock repurchases, and principal repayments on loans.

Cash-in changes occur when capital is generated, while cash-out changes occur when dividends are paid. So, a corporation can raise capital in the form of bonds issued to the general public. Paying interest to bondholders, however, reduces the amount of cash available to the corporation. Interest is a monetary outlay, but it’s recorded as an operational expenditure rather than a financing one.

Instructions for Making a Cash Flow Report

Collect Financial Records

Gather all of the required financial statements before you start:

Income statement: Details a company’s income, expenditures, and net profit or loss.
Balance sheet: Shows the company’s assets, debts, and ownership at the start and end of the period of time.

Pick a Time Frame for Reporting

Find out what time frame you’re making the cash flow report for. This might be done on a monthly, quarterly, or yearly basis.

Pick the Approach

Before you begin preparing the CFS, choose between the direct and indirect methods.

The direct technique entails recording all monetary transactions that occurred within the reporting period.

The indirect technique takes net income as a starting point and then accounts for variations in non-cash transactions.

Get the Statement Ready

Operating Activity Cash Flow

Direct Approach:

Compile a list of all cash receipts, including client payments.
Expenses paid in cash should be detailed, including payments made to vendors, workers, interest, and taxes.
Subtract all cash payments from all cash receipts to determine net cash flow from operational activities.

Indirect Approach:

Take a look at the income statement to find the net income.
Be sure to include depreciation and amortization when adjusting for non-cash items.
Take into consideration any shifts in working capital by adjusting the relevant accounts receivable, inventory, payable, and other related accounts.
The net cash flow from operational activities may be calculated by adding changes in working capital to the adjusted net income.

Cash Flow from Investments

List the cash transactions that took place for investments. These should include the cash that was used to buy fixed assets, the cash that was received from selling assets, and the cash that was used to buy or receive investments in stocks.

Subtract the cash outflow for investments from the cash inflow for investment sales to get the net cash flow from investment operations.

Finance-related Cash Flow

Track all monetary transactions related to finance, including those that include the sale of stock or debt, the repayment of debt, and the purchase of back-issued shares.

After deducting all cash outflows from all cash inflows, you will have your net cash flow from financing operations.

Put All Sections Together

To find out how much cash and cash equivalents changed over the time, add up the net cash flows from operating, investing, and financing activities.

Match Up with the Starting Cash

To get the final cash balance, add the change in cash to the starting cash balance. Make sure this balance matches the cash balance shown on the balance sheet.

What Is the Formula For Cash Flow?

The direct approach and the indirect method are both ways to figure out the cash flow.

1. The Direct Method of Cash Flow

The direct technique involves tallying up all the monetary transactions, such as payments made to vendors, payments received from clients, and salary disbursements. When it comes to cash basis accounting, this CFS technique is more user-friendly for small enterprises.

An alternative way to arrive at these numbers is to compare the opening and closing balances of different asset and liability accounts and then find the net change, if any, in the accounts. The presentation is simple.

The accrual technique of accounting is the most common. In such situations, income is recorded at the time it is earned instead of when it is received. Since not all transactions involving net income on the income statement contain actual cash items, this leads to a discrepancy between net income and actual cash flow. Consequently, the calculation of cash flow from operations requires a reevaluation of some components.

2. The Indirect Cash Flow Method

To determine cash flow using the indirect approach, one must first modify net income by adding or removing amounts due to transactions that do not involve cash. Variations in a business’s assets and liabilities from one accounting period to the next reveal non-cash components. In order to determine an accurate cash influx or outflow, the accountant will keep track of any changes to the asset and liability accounts, which may raise or reduce the net income amount.

Every time an accounting period ends and a new one begins, the cash flow statement must reflect the change in accounts receivable (AR) on the balance sheet:

If AR goes down, it might mean that more money came into the business from consumers paying off their credit cards. To calculate net earnings, add the amount by which AR went down.

Even though the quantities reflected in AR are revenue, they are not cash, thus if AR increases, net earnings will be lower.

So, what if a business’s inventory were to change? On the CFS, they are recorded in the following way:

When a business’s inventory grows, it means they invested more money into purchasing raw materials. By paying with cash, the value of the inventory is subtracted from the net earnings.

Reducing inventories would boost net profitability. The balance statement shows a rise in accounts payable due to credit purchases, and the amount of this increase from one year to the next gets added to net earnings.

Payroll expenses, taxes, and prepaid insurance all follow the same reasoning. To calculate net income after paying off debt, take the difference between the value of the debt in one year and the next. Net profits will need to include any discrepancies in the event that there is an outstanding balance.

Problems with Cash Flow Statements

You should not jump to conclusions based on a negative cash flow. Unfortunately, a company’s decision to develop its business at a specific point in time can occasionally lead to poor cash flow, even though it would be beneficial for the future.

If an investor compares cash flow from different periods, they can see how the firm is doing and if it’s about to go bankrupt or thrive. When evaluating the CFS, it is important to keep in mind that it is only one of three financial statements.

If you use the indirect cash flow approach, you may reconcile your income statement and balance sheet, two more financial statements.

Financial Statements (Cash Flow, Income, and Balance Sheet)

One way to evaluate a business’s health is to look at its cash flow statement. However, it is less susceptible to manipulation by the timing of non-cash transactions. The balance sheet and the income statement may be used to determine the CFS, as mentioned above. The data on the CFS is calculated using the net earnings from the income statement. However, they are solely considered for calculating the CFS’s operational activities section. Therefore, the CFS’s investment and financial operations parts are unrelated to net earnings.

An item on the income statement that does not really result in a cash outflow is depreciation spending. Basically, it’s just spreading out the initial investment in an asset across its expected lifespan. Companies have some discretion in choosing their depreciation method, which affects the income statement depreciation expenditure. Contrarily, the CFS is a more stable indicator of real inflows and outflows.

There should be no discrepancy between the net change in the different line items shown on the balance sheet and the net cash flow shown on the CFS. Things like cumulative depreciation and accumulated amortization do not fall under this category, nor do cash and cash equivalents. In order to determine the cash flow for 2019, for instance, you must refer to the balance sheets for both 2018 and 2019.

In contrast to the income statement and the balance sheet, the cash flow statement (CFS) does not account for the amount of money that will be coming in and going out in the future, which is shown as costs and revenues. The difference between cash and net income is that the latter includes both cash and sales made on credit in its calculations.

How Do Indirect and Direct Cash Flow Statements Differ?

The distinction is in the method used to calculate the inflows and outflows of cash.

With the direct technique, you know exactly how much money is coming in and going out. Payouts and receipts in cash form the basis of the cash flow statement.

You don’t need to know the exact cash coming in and going out to use the indirect way. To calculate implicit cash inflows and outflows, the indirect technique starts with the net income or loss from the income statement and then adjusts the amount using changes in the balance sheet accounts.

Is There a Clear Winner Between the Direct and Indirect Approaches to Cash Flow Statements?

Neither of them is inherently superior or inferior. But, the indirect technique also gives a way to match up the balance sheet items with the income statement net income. An accountant can determine whether changes to the balance sheet are due to non-cash transactions as they produce the CFS utilizing the indirect technique.

To have a better grasp of the financial statements overall, it is helpful to examine the balance sheet accounts and how they relate to the income statement’s net income.

What Does Cash and Cash Equivalents Mean?

A company’s balance sheet will only show one line item for cash and cash equivalents. It details the worth of an organization’s assets that are either immediately convertible into cash or have a short conversion time (often 90 days) to become cash. Currency, petty money, bank accounts, and other assets with a high liquidity and a short time horizon are all considered cash and cash equivalents. Government bonds having a maturity of three months or less, commercial paper, and Treasury bills are all examples of cash equivalents.

An Example of How to Figure Out Cash Flow

The cash flow statement is one of the most useful tools for assessing a company’s financial health. External stakeholders, such as lenders and investors, can use the report to gauge the company’s success and investment value, in addition to internal stakeholders. One simple way to figure out cash flow is by looking at the following:

For example, if Cary begins his small business endeavor with $10,000 in savings and an extra loan of $15,000 from a private lender, he will begin with a total of $25,000 to fuel his enterprise. He uses the whole sum in the first year to launch his company. It doesn’t take long for Cary’s firm to turn a tidy profit; in fact, he earns $55,000 in the first year alone from operational activities like sales.

However, $5,000 in credit transactions have contributed to this revenue. Cary has to consider his operating, investing, and financing operations to find out his cash flow situation, or how much cash he has on hand right now. To have a clear view of his cash inflow, Cary must deduct the outflow amount of $25,000 from his total revenue. This is because he invested $10,000 of his own money to launch his firm and is already indebted $15,000 to a private lender.

Taking all of this into consideration, it is clear that Cary’s first year in company only resulted in a total profit of thirty thousand dollars. Just $25,000 is available to Cary at the moment due to the fact that $5,000 of his income came from overdue credit transactions. The good news for Cary is that this cash flow is positive. If Cary and his colleagues use this computation—which factors in all cash-related activity—they will be able to make better business choices going forward.

Eight Arguments in Favor of Using a Cash Flow Statement

When it comes to cash, cash flow statements are a lifesaver for companies. This is why a cash flow account might be good for your business:

1. An understanding of spending habits

A cash flow statement provides a more complete view of a company’s financial transactions than a profit and loss statement does. A profit and loss statement would not reflect, for example, the repayment of a loan that your firm has taken out. This data would be part of a cash flow statement, which would show how your company actually spent its money. With the help of a cash flow report, you may get a clear picture of your company’s outflow of funds.

2. Plans for the near future

When it comes to making plans for the near future, cash flow figures are invaluable to businesses. To prevent insolvency and fulfill commitments like paying salaries, operational expenses, and more, all businesses must maintain financial solvency. Financial managers may use cash flow statements to track expenditure toward particular, short-term objectives and to forecast the cash flow in the near future since they offer a complete report on the amount of cash a company has on hand at a given moment.

3. Clearer view of financial strategy outcomes

Companies usually make financial plans to follow in order to make sure their projects are successful. Regardless, companies still fail occasionally to carry out their financial strategies precisely or achieve the goals set out during the planning phase. A cash flow statement allows users to compare predicted cash flow statistics to actual cash flow results, which can help firms examine the effectiveness of their financial planning. This data can help businesses improve their future forecasting efforts.

4. Possibility of boosting revenue

With accurate information about their present cash influx and outflow, firms may redirect their efforts toward activities that generate cash other than profit. Making money is important, but there are other ways to achieve it, and sometimes those ways are better in the long run. To illustrate the point, if a business discovers that it is overspending on inventory, its workers might look for ways to optimize processes, such as making better use of inventory to speed up the collection of receivables, in order to generate more income.

5. A better understanding of the cash balance

Having a firm grasp of the sweet spot for operating capital is critical information for stakeholders and company owners. A cash flow account is one of the most useful tools for businesses because it helps them figure out if they have too much or too little money. To achieve the ideal cash balance, a business might invest its surplus, or seek outside financing from investors or lenders if it is short.

6. Capital expenditure evaluation

The term “working capital” refers to a company’s accessible finances, which include the cash, deposits, and other reserves that are on hand to cover operational and day-to-day needs. Executives, investors, and anyone interested in a firm’s financial health can use cash flow statements to better understand how that company moves its working capital. With the use of this research, a company may streamline its processes to better manage cash flow and increase revenue.

7. Strategy for the future

Financial managers may use cash flow statements for long-term planning in the same way they use them for short-term planning. Accurate financial planning is essential for a company’s success, and managers may find precise, practical adjustments with the use of a cash flow statement. In the long run, these adjustments can put the company in a strong financial position. Financial managers may essentially learn how to prioritize tasks with the use of a cash flow statement.

8. Situational analysis

A cash flow statement is useful for crisis management since it shows stakeholders if the company has enough or too much cash on hand. A manager’s ability to foresee when their organization would face a financial crunch might help them devise strategies to get through it. For some businesses, this is a game-changer when it comes to accomplishing their goals.

Have a quick question? We answered nearly 2000 FAQs.

See all blogs: Business | Corporate | Employment

Most recent blogs:

Best Free VOIP Services for 2025

Compare the best free VoIP services for 2025, including Google Voice, Ringblaze, OnSIP, and Zoom Phone. Evaluate features, pricing, pros, and cons to choose a reliable communication tool without exceeding your business budget.

How to Start a Business With No Money

Start a business with no money by identifying ideas, building connections, and creating value through small, focused steps. Overcome self-doubt, engage real customers early, and grow sustainably without relying on upfront capital or flashy marketing.

Best Retail POS Systems for 2025

Square, Clover, Shopify, Lightspeed, and Epos Now rank among the top retail POS systems for 2025. Compare pricing, hardware, and features to find the best system for your store’s size, style, and growth needs.

Wix vs WordPress: A Complete Comparison of Features, Pricing, and Ease of Use

Compare Wix and WordPress on features, pricing, templates, and ease of use to find the right fit for your website. Wix offers simplicity and built-in tools, while WordPress provides advanced customization and flexibility for growing businesses.

How to Start a Cleaning Business in 2025

Start your cleaning business in 2025 using this guide on essentials, legal steps, pricing methods, and practical marketing strategies. Ensure success with business management tips, client attraction techniques, and smart budgeting for your cleaning startup.

Shopify vs Etsy: Features, Costs & Customization Compared

Compare Shopify and Etsy on features, pricing, and customization to decide the ideal e-commerce platform for your online business. Evaluate key differences in tools, fees, scalability, and storefront design to maximize your selling potential on Shopify, Etsy, or both.

Can I Legally Move Out at 17?

Is it legal to move out at 17? Emancipation allows minors to live independently, make financial decisions, and take on adult responsibilities. However, they still must follow certain laws like schooling and marriage.

What Is the California Fraud Assessment Fee?

The California fraud assessment fee is a mandatory charge for insurers, capped at $1 per insured vehicle, funding fraud investigations and prosecutions. Funds support the Fraud Division, California Highway Patrol, and district attorneys in combating auto insurance fraud and economic automobile theft.

How Does a Quiet Title Action Work in California?

A quiet title action in California resolves property ownership disputes by legally clarifying title claims through a court process. It removes uncertainties caused by liens, boundary issues, adverse possession, or estate disputes, ensuring clear ownership rights.

What Should Be Included in a Demand Letter in California?

A demand letter in California should outline the dispute, requested resolution, deadline, and legal consequences of noncompliance. A well-structured demand letter increases the chances of settlement and may help avoid costly litigation.

Why Is It Important to Reconcile Your Bank Statements and How Often Should You Do It?

A bank reconciliation statement helps detect errors, prevent fraud, and ensure accurate financial reporting. Regular reconciliation—monthly or more frequently—improves cash flow management and financial decision-making.

Is Loli Illegal? U.S. Laws on Lolicon and Legal Consequences

Lolicon's legality in the U.S. depends on federal and state laws, with potential criminal penalties for possession or distribution. Courts assess whether content violates child pornography statutes, making legal interpretations complex and case-dependent.

What Is Variable Cost and How Does It Impact Pricing Strategies?

Variable costs fluctuate with production or sales, impacting pricing strategies and profit margins. Businesses must analyze variable costs to optimize pricing, budgeting, and profitability while maintaining competitive advantages.

What Is Unilateral Action and How Is It Used in Contracts?

A unilateral contract binds only the offeror, requiring payment only when the offeree completes a specified task. Common examples include reward offers, insurance policies, and open requests, emphasizing performance-based obligations.

What Is Estate Planning and Why Is It Important for Families?

Estate planning ensures assets are distributed according to your wishes and protects loved ones from legal complications and tax burdens. A well-structured estate plan helps prevent family conflicts, secures guardianship for minors, and minimizes unnecessary financial losses.

What Is a Revocable Living Trust and How Does It Benefit Estate Planning?

A revocable living trust offers flexibility in estate planning, allowing asset control during life and seamless transfer after death. It avoids probate, ensures privacy, and provides a structured way to manage assets, reducing costs and legal complications for beneficiaries.

What Is a Quitclaim Deed and How Does It Differ From a Warranty Deed?

A quitclaim deed transfers property ownership quickly but offers no buyer protections, unlike a warranty deed that ensures a clear title. Often used among trusted parties, quitclaim deeds help with estate planning, divorce settlements, and correcting title errors without verifying property liens or claims.

What Is a Deed of Trust, and How Is It Different From a Mortgage?

A deed of trust secures real estate loans by involving a trustee, differing from mortgages, which have only two parties. Unlike mortgages, deeds of trust often enable nonjudicial foreclosure, expediting property recovery for lenders in case of default.

What Is a Contingent Beneficiary, and How Does It Differ From a Primary Beneficiary?

A contingent beneficiary receives assets only if the primary beneficiary cannot. Naming one helps avoid probate and ensures smooth inheritance distribution.

What Is a Durable Power of Attorney, and How Does It Differ From a Regular Power of Attorney?

A power of attorney lets someone manage your financial, legal, or health matters, but it expires if you lose mental competence. A durable power of attorney remains valid even after incapacity, ensuring your affairs are handled without court intervention.

What Is a Cash Flow Statement, and How Does It Help in Business Planning?

A cash flow statement tracks a company's incoming and outgoing cash, revealing financial health and operational efficiency. It helps businesses plan investments, manage liquidity, and make informed financial decisions by assessing cash flow from operations, investments, and financing activities.

What Is a Bill of Sale, and How Is It Used in Transactions?

A bill of sale is a legal document confirming the transfer of ownership in various transactions, ensuring clarity and security for both parties. It details the buyer, seller, asset, payment terms, and conditions, offering legal protection and proof of sale.

What Is a 1099, and How Does It Relate to Tax Reporting?

A 1099 form reports payments made to independent contractors, freelancers, and other non-employees for tax purposes. Businesses must file the correct 1099 form to ensure compliance with IRS regulations and avoid penalties.

What Is a Beneficiary, and What Role Do They Play in Estate Planning?

A beneficiary is someone designated to receive assets from an estate, financial account, or insurance policy. Naming beneficiaries ensures assets are distributed according to your wishes, avoiding legal complications and delays.

What Does P&L Mean, and How Is It Used in Financial Reporting?

A profit and loss (P&L) statement tracks a company's income and expenses over time, showing whether it is profitable or losing money. Businesses use P&L statements to analyze financial performance, make strategic adjustments, and meet investor or lender requirements.

What Does NNN Mean, and How Does It Apply to Commercial Leases?

A triple net lease (NNN) requires tenants to cover property taxes, insurance, and maintenance in addition to rent and utilities. While offering landlords steady income with reduced expenses, tenants gain control over the property but assume higher financial responsibility.

How Do You Start Your Own Business, and What Challenges Might You Face?

Starting a business involves planning, funding, and selecting a legal structure while ensuring your concept meets market demand. Entrepreneurs face financial risks, customer acquisition challenges, and work-life balance struggles, making preparation essential for success.

How Do You Create a Business Plan, and Why Is It Important for Startups?

A business plan outlines your company's mission, structure, and financial strategy, helping attract investors and guide decision-making. Startups benefit from a well-crafted plan by reducing risk, securing funding, and creating a roadmap for sustainable growth.

How Does USPS Priority Mail Differ from Standard Mail Services?

USPS Priority Mail delivers faster than standard mail, includes tracking, and offers flat-rate options, making it ideal for urgent shipments. Standard mail is more affordable but lacks tracking, insurance, and guaranteed delivery times, making it better suited for non-urgent items.

How Does Slander Differ from Libel in Defamation Cases?

Slander refers to spoken defamation, while libel involves written falsehoods that harm reputations. Legal distinctions depend on evidence, intent, and public versus private figures.

See all blogs: Business | Corporate | Employment

115

What Is a Cash Flow Statement, and How Does It Help in Business Planning?

What Does a Cash Flow Statement (CFS) Show?

The Function of the Cash Flow Statement

Overview of the Cash Flow Statement’s Structure

Operating Activity Cash Flow

Cash From Investment Activities

Cash Received from Financing Activities

Instructions for Making a Cash Flow Report

What Is the Formula For Cash Flow?

Problems with Cash Flow Statements

Financial Statements (Cash Flow, Income, and Balance Sheet)

How Do Indirect and Direct Cash Flow Statements Differ?

Is There a Clear Winner Between the Direct and Indirect Approaches to Cash Flow Statements?

What Does Cash and Cash Equivalents Mean?

An Example of How to Figure Out Cash Flow

Eight Arguments in Favor of Using a Cash Flow Statement

Free Consultation