What Is a Cash Flow Statement? Example and Template (2024) - Shopify (2024)

Cash is the lifeblood of every business—especially new and small businesses.

Limited or inconsistent cash flow is one of the most significant challenges that small businesses face. That’s why understanding and managing cash flow is a prerequisite for success.

To get a grasp of the cash flows going in and out of your business, you need a cash flow statement. If you’re having a hard time with financial statements, don’t worry: this guide explains the ins and outs with a free cash flow statement template to download and use.

What is a cash flow statement?

A cash flow statement is a financial statement that summarizes the inflows and outflows of cash transactions during a given period of business operations.

The purpose of a cash flow statement is to record how much cash (or cash equivalents) is entering and leaving the company. Businesses use cash flow statements to get a detailed picture of their cash position, which is essential to a company’s financial health.

Many small businesses fall into the trap of focusing too much on profit and loss, ignoring company cash flow in the process. Having a clear overview of cash flows will allow you to understand where money is coming from and how it is spent.

Recording movements of cash is easier if you use a template for small businesses. A cash flow statement template typically comes in a spreadsheet format, pre-loaded with the necessary formulas for easy calculations.

Why is cash flow important?

Cash flow is like having enough money in your bank account to pay your bills. If you don’t have enough cash coming in, you can’t pay for things like employees, suppliers, or rent. Just like you might plan a personal budget, businesses use a cash flow statement to make plans.

If you have good cash flow, banks and investors are more likely to lend you money or invest in you. It’s like having a good credit score that makes it easier to get a loan.

Cash flows vs. other financial statements

Financial statements are reports that summarize the financial performance of your business. A cash flow statement is one of the three main types of financial statements, alongside a balance sheet and an income statement.

An income statement measures revenue, expenses, and profitability, while a company’s balance sheet shows the assets, liabilities, and shareholders’ equity. Meanwhile, a cash flow statement records the increases and decreases in cash.

All three financial statements are different, but linked. Net income from the income statement feeds into retained earnings on the balance sheet, and it is the starting point in the cash flow statement.

Types of cash flows

The cash flow statement shows the three main types of cash flows:

Cash flow from operating activities

The operating activities in the cash flow statement include core business activities. This section measures the cash flow from a company’s provision of products or services. Examples of operating cash flows include sales of goods and services, salary payments, rent payments, and income tax payments.

Cash flow from investing activities

Investing activities include cash flows from the acquisition and disposal of long-term assets and other investments not included in cash equivalents. These represent long-term investments in the company’s growth. For instance, purchasing or selling physical assets like real estate or vehicles, and non-physical property, like patents.

Cash flow from financing activities

Cash flows related to financing activities typically represent cash from investors or banks, issuing and buying back shares, and dividend payments. Whether you are getting a business loan, paying interest to service debt, or distributing dividends, all of these transactions fall under financing activities.

How cash flow is calculated

There are two methods for calculating cash flow: the direct and indirect method.

No matter which method you choose, only the operating activities section of your cash flow statement will be affected. The two other sections, cash from investing and financing activities, will remain the same.

Direct method

The direct method adds up all the cash inflows and outflows from operating activities. It’s based on the cash basis accounting model that recognizes revenues when cash is received and expenses when they are paid. The direct method for cash flow calculation is straightforward, but it requires tracking every cash transaction, so it might require more effort.

Pros:

• Transparent
• Easy to understand
• Uses real-time figures

Cons:

• Takes more time and effort
• Can be an issue for businesses using accrual accounting (see below)
• Businesses using this method still need to reconcile net income with cash flow from operating activities

Indirect method

Indirect method uses net income as a base and adjusts it based on non-cash expenses like depreciation and amortization.

This method is suitable for businesses using accrual accounting, where revenue is recorded when it is earned rather than when it is received. When using the indirect method, begin with the net income from your income statement, then make adjustments to undo the impact of accruals made during the period.

Pros:

• Easy to prepare
• Allows for reconciliation with income statement and balance sheet
• Discloses non-cash transactions

Cons:

• Lack of transparency

How to prepare a cash flow statement

Direct method

1. Start with cash receipts

List your receipts of cash made from customers. This doesn’t include any sales made on credit, just cash collected from sales or services.

2. Add interest or dividends received

Add any income you received from interest or earned from dividends during the accounting period.

3. Subtract cash payments made to employees or suppliers

List all cash payments you made to employees, including salaries, contract and freelance labor. This also includes any income tax you paid. Here you’ll also list any payments made to suppliers during the accounting period, including any fees or interest paid.

4. Calculate cash flow

Add the cash collected and subtract the cash payments made during the accounting period. This will give you a clear picture of the cash flow available.

Based on that number, you can figure out if cash increased or decreased for the period. This is a big indicator of how well a company is doing financially, and how much cash it can generate to pay bills and invest for the future.

Indirect method

1. Start with net income

A cash flow statement starts with net income. Based on the income statement, it’s the profit or loss after all expenses, including taxes, have been deducted.

Net income is calculated by subtracting all operational expenses, interest payments, taxes, and other expenses from total revenue.

It’s important because it’s the basis for cash flow adjustments. Although net income is a measure of profitability, it doesn’t equal cash flow.

2. Add non-cash expenses

Non-cash expenses are adjustments made to net income to reflect the actual cash position of your business.

Depreciation and amortization are the most common non-cash expenses. Depreciation is how you spread the cost of tangible assets over their useful lives, while amortization is how you spread the cost of intangibles.

It also includes losses from the sale of assets, even though they might not have resulted in a cash outflow.

3. Subtract changes in working capital

Working capital is the difference between current assets (like cash, inventory, and receivables) and liabilities (like accounts payable and short-term debt), and may fluctuate from one period to the next.

4. Add other cash items

This step involves adjusting for other cash inflows and outflows not included in net income and working capital. These include dividends paid, interest paid, and any other cash investments or payments.

5. Calculate cash flow

The final step is to calculate the total cash flow for the period. This is done by combining the net income, adjustments for non-cash expenses, changes in working capital, and other cash items.

Cash flow statement template

You don’t need to start from scratch when preparing a statement of cash flows. Download the free cash flow statement template and start tracking your business’s finances today.

It’s easy to use, with simple instructions, and you can customize it to suit your business’s accounting periods.

TEMPLATE SHORTCODE

To use this template, simply follow these three steps:

1. Gather relevant documentation

To fill out the template, you need financial information like receipts, invoices, bank statements, and other documents.

2. Fill out the template

As you input your numbers, the spreadsheet’s formulas will update automatically. The template should also include the starting balance so it can be carried forward, giving you an accurate calculation of your cash flow in each period.

3. Review the cash flow statement

Your cash flow statement is ready. But what does it mean? It’s time to do some cash flow analysis.

Cash flow analysis involves reading the cash flow statement to get a better sense of your business’s cash flow management and maybe even do some cash flow forecasting (predicting future cash flows).

How to read a cash flow statement

The goal of the cash flow statement is to show the amount of cash generated and spent over a specific period of time, and it helps businesses analyze the liquidity and long-term solvency.

When you summarize all cash transactions, you can get a positive or a negative cash flow.

Positive cash flow

This means you have more money coming in than going out. This opens up opportunities for reinvesting excess of cash in business growth. However, positive cash flow doesn’t necessarily mean that your business is profitable. There are cases where the company has a negative net income, but a positive cash flow due to borrowing activities.

Negative cash flow

This indicates that you’ve spent more cash than you’ve generated during a specific period of time.

Negative cash flow isn’t necessarily a bad thing, especially if it results from investment in future growth.

For instance, VC-funded startups often exhibit negative cash flow, or burn rate, as they work to gain market share, win customers, and generate higher long-term profits. However, if you have a negative cash flow in more than one accounting period, you should consider it a red flag for your business’s financial health.