Cash Flow Statement: Format, Example and How to Read It

Quick answer: A cash flow statement shows the cash that came into and went out of a business over a period, split into operating, investing and financing activities. The three section totals add up to the change in your cash balance. It explains why profit and cash differ, which the P&L alone cannot.

This article is about the historical financial report: how it is laid out, how to prepare it with the indirect and direct methods, and how to read it. If you want practical ways to improve your cash position, see our guide to cash flow management; if you want to project future cash, see how to build a cash flow forecast. Here we focus on understanding what already happened.

On scope: the invoice generator on this site creates PDF invoices in your browser. It does not track payments or produce financial statements; your accounting software builds this report from your ledger. Getting invoices out promptly does, however, have a direct effect on the operating section, as the example below shows.

What is a cash flow statement?

The statement of cash flows is one of the three core financial statements, alongside the profit and loss statement and the balance sheet. The P&L tells you whether you earned a profit; the balance sheet tells you what you own and owe on one date; this report connects them by explaining how cash moved during the period.

Report	Covers	Main question
Profit and loss	A period	Did we make a profit?
Balance sheet	A single date	What do we own and owe?
Statement of cash flows	A period	Where did cash come from and where did it go?

The three sections

Section	What it includes	Typical small business examples
Operating activities	Cash from the main revenue-producing activities	Customer receipts, payments to suppliers, wages, rent, taxes
Investing activities	Buying and selling long-term assets and investments	Buying a vehicle or computer, selling old equipment
Financing activities	Cash from and to owners and lenders	Loan proceeds, loan principal repayments, owner contributions, draws, dividends

Classification of a few items, especially interest and dividends, depends on the accounting framework. Under US GAAP, interest paid is generally an operating cash flow. IAS 7, the international standard, has historically allowed a choice for some of these items. The IFRS Foundation's IAS 7 page is the authoritative source, and amendments that come with IFRS 18, for annual periods beginning on or after January 1, 2027, remove some of those choices for many companies. If you report under IFRS, confirm the current treatment with your accountant.

Direct vs indirect method

Only the operating section differs between the two methods. Investing and financing are presented the same way under both.

	Direct method	Indirect method
Starting point	Actual cash receipts and payments	Net income
Typical lines	Cash received from customers; cash paid to suppliers and employees	Net income, add back depreciation, changes in working capital
Strength	Easy for non-accountants to read	Shows why profit and cash differ
Standards	Encouraged under IAS 7; permitted under US GAAP, which also asks for a reconciliation to net income	Permitted under both
In practice	Less common	Used by most companies and most accounting software

Cash flow statement format (indirect method)

Below is a template for the indirect layout most small businesses will see in their software.

Line	Item
A	Net income
B	Add back non-cash expenses (depreciation, amortization)
C	Less increase (or add decrease) in accounts receivable
D	Less increase (or add decrease) in inventory and prepaid expenses
E	Add increase (or less decrease) in accounts payable, accrued expenses and customer deposits
F	Net cash from operating activities (A through E)
G	Net cash from investing activities
H	Net cash from financing activities
I	Net change in cash (F + G + H)
J	Cash at beginning of period
K	Cash at end of period (I + J)

The logic for working capital lines: when receivables rise, you recorded revenue that has not been collected, so you subtract the increase. When payables rise, you recorded expenses you have not yet paid, so you add the increase. The relationship between these items is covered in more depth in our working capital guide.

Worked example

Here is an illustrative full-year example for the fictional Cedar Lane Design. All figures are invented.

From the P&L: revenue $150,000; cash-type expenses $116,000; depreciation $4,000; net income $150,000 − $116,000 − $4,000 = $30,000.

From the balance sheets at the start and end of the year: accounts receivable rose by $6,000, accounts payable rose by $2,000, and customer deposits rose by $1,500. During the year the studio bought equipment for $12,000, borrowed $10,000, repaid $3,000 of loan principal, and the owner drew $20,000. Opening cash was $8,000.

Statement of cash flows, year ended Dec 31	Amount
Net income	$30,000
Add: depreciation	$4,000
Less: increase in accounts receivable	($6,000)
Add: increase in accounts payable	$2,000
Add: increase in customer deposits	$1,500
Net cash from operating activities	$31,500
Purchase of equipment	($12,000)
Net cash from investing activities	($12,000)
Loan proceeds	$10,000
Loan principal repaid	($3,000)
Owner's draws	($20,000)
Net cash from financing activities	($13,000)
Net change in cash	$6,500
Cash at beginning of year	$8,000
Cash at end of year	$14,500

The arithmetic:

• Operating: $30,000 + $4,000 − $6,000 + $2,000 + $1,500 = $31,500.
• Financing: $10,000 − $3,000 − $20,000 = −$13,000.
• Net change: $31,500 − $12,000 − $13,000 = $6,500.
• Ending cash: $8,000 + $6,500 = $14,500, which must match the cash line on the year-end balance sheet.

The same operating section, direct method

• Cash received from customers: revenue $150,000 − increase in receivables $6,000 + increase in customer deposits $1,500 = $145,500.
• Cash paid for expenses: cash-type expenses $116,000 − increase in payables $2,000 = $114,000.
• Net cash from operating activities: $145,500 − $114,000 = $31,500, the same total as the indirect method.

Depreciation does not appear in the direct version at all, because it never involved cash. The equipment purchase that it relates to shows up in investing; our guide to capex vs opex explains that split.

How to read the statement

• Is operating cash flow positive and close to net income? Here $31,500 against $30,000 of profit is healthy. If operating cash is persistently well below profit, look at receivables.
• What is driving the gap? The $6,000 rise in receivables means customers are paying more slowly or sales grew. Tracking days sales outstanding tells you which.
• How is investment funded? Equipment of $12,000 was more than covered by operating cash.
• Are the owners taking more than the business generates? Draws of $20,000 plus $3,000 of principal used most of the remaining cash; the new $10,000 loan filled the gap.
• Free cash flow. A common definition is operating cash flow minus capital spending: $31,500 − $12,000 = $19,500. Definitions vary, so state which one you use.

The single biggest lever most service businesses have on the operating section is collections: invoicing promptly, setting clear terms and following up. Our accounts receivable guide covers that process.

Cash flow statement vs cash flow forecast

The names are similar, but the two documents answer different questions.

	Statement of cash flows	Cash flow forecast
Time direction	Past period	Future weeks or months
Source	Your ledger, P&L and balance sheets	Your estimates of receipts and payments
Format	Operating, investing, financing sections	Usually a week-by-week or month-by-month grid
Main use	Explaining results; lender and tax reporting	Planning, spotting shortfalls early

The two work best together. Last year's cash flow statement shows the patterns, such as how long customers really take to pay and how much goes to equipment and draws, and those patterns become the assumptions in your forecast.

Who needs one, and how often

Larger companies that publish full financial statements under US GAAP or IFRS generally include a cash flow statement. For a small private business, whether you must prepare one depends on your country, legal structure and any loan agreements, so check with your accountant. Even when nobody requires it, reviewing the report quarterly is a sensible habit, and monthly is better if cash is tight. Most accounting software generates it automatically once your bank accounts are reconciled and your balance sheet is accurate, so the main effort is keeping the underlying books clean.

Common mistakes

• Getting working capital signs backwards. An increase in an asset uses cash; an increase in a liability provides it.
• Forgetting to add back depreciation. It reduced profit but used no cash.
• Putting loan principal in operating. Principal repayments belong in financing.
• Treating owner draws as an expense. They are a financing outflow and never hit the P&L.
• Not tying ending cash to the balance sheet. If they disagree, something is misclassified or missing.
• Confusing the report with a forecast. This statement looks backward; a forecast looks forward.

Checklist before you rely on the numbers

• The P&L and both balance sheets cover the same basis and dates.
• Bank and card accounts are reconciled.
• Depreciation and other non-cash items are added back.
• Every change in current assets and liabilities is reflected in operating.
• Asset purchases and sales are in investing.
• Loans, repayments, contributions and draws are in financing.
• Opening cash plus net change equals closing cash on the balance sheet.

Next step

Run this report for last year from your accounting software and walk through it with the questions above. Pay particular attention to the gap between net income and operating cash, because that is where slow collections and growing inventory show up first. Pay particular attention to the gap between net income and operating cash, because that is where slow collections and growing inventory show up first. Then compare it with your current forecast to see whether the patterns are changing. More reports and ratios are covered in the business finance section.