How to create and read a business cash flow statement

As a business owner, understanding how money moves through your business is essential to keeping it healthy and growing. That’s why a cash flow statement is so important. It shows you exactly how cash enters and leaves your business over a specific period. It can be used to help you stay ahead of expenses, plan for the future and make more informed financial decisions.

Knowing how to read—and create—a cash flow statement can give you greater clarity and control. Keep reading to learn what a cash flow statement is, why it matters and how to use it as a tool to support smarter business planning.

What you’ll learn:

• A cash flow statement shows your business’s actual cash position—not just the numbers on paper.

• It breaks down where money comes from and where it’s going across operations, investments and financing.

• Understanding your cash flow helps you anticipate challenges, seize opportunities and plan more confidently for growth.

• When used with balance sheets and income statements, the cash flow statement becomes a powerful tool for smart decision-making.

A cash flow statement is a type of financial report that tracks the actual movement of cash in and out of your business during a specific period of time, typically monthly, quarterly or annually. Unlike other financial statements that focus on profits or assets, this one zeroes in on liquidity—how much cash your business really has on hand to cover expenses, reinvest or save.

At its core, a cash flow statement shows whether you’re generating enough cash to support and grow your business. It breaks down your cash activity into three main categories:

• Operating

• Investing

• Financing

This breakdown allows you to see where money is coming from, where it’s going and whether your cash position is improving or declining.

For small business owners, a cash flow statement can be an essential tool that indicates early warning signs of trouble, highlights opportunities for reinvestment and supports better decision-making.

There are three main sections in a cash flow statement—operating, investing and financing. Each highlights a different way cash moves through your business. Together, these components give you a clearer picture of your financial activity—not just what you’ve earned on paper, but what’s actually available in the bank.

This section represents the cash generated or used by your day-to-day business operations. It includes items like:

• Customer payments

• Supplier expenses

• Payroll

• Rent

• Taxes

It’s essentially the cash inflows and outflows associated with your core business activities.

A positive cash flow from operations typically means your business is generating enough revenue to cover its regular expenses. But if this number is consistently negative, it may signal problems with profitability, pricing or cash management.

Monitoring this section helps you stay on top of your business’s financial health and make adjustments before minor issues turn into bigger ones.

Cash flow from investing activities reflects how your business is using cash to grow and invest in its future. This includes the purchase or sale of long-term assets such as equipment, property or vehicles, as well as investments in other businesses.

Spending cash in this section isn’t necessarily a bad thing—it often means you’re reinvesting in your operations. Still, it’s important to monitor these outflows carefully to make sure your spending supports your business goals and doesn’t strain your overall cash position.

Tracking financing activities helps you understand how outside funding impacts your cash position. 

This section shows cash flow related to how your business is funded—including money coming in from loans, investors or credit lines, as well as cash going out to repay debt, buy back shares or pay dividends. A strong inflow may suggest you’ve brought in new funding, such as debt financing, to help your business grow, while steady outflows may indicate you’re focused on paying down debt. 

Either way, keeping an eye on your financing activities gives you a clearer picture of how you’re managing money from outside sources—and how that support is helping move your business forward.

Here’s an example of what a basic cash flow statement might look like for a small business over one month. This snapshot helps illustrate how cash moves in and out across operating, investing and financing activities.

In this example, the JollyJive Company reported a positive net cash flow of $9,000 for January, indicating the business generated more cash than it spent during the month. It also demonstrates how different types of activities contribute to the business’s overall cash position and underscores the importance of effective cash flow management in keeping operations running smoothly.

Creating a cash flow statement might sound complicated, but it’s really just a matter of organizing the financial data you already have. By breaking it down step by step, you can build a clear picture of your business’s cash activity. This helps you better understand where your money is going—and why. 

Whether you’re doing it manually, using a spreadsheet or working with accounting software, here’s how to get started:

First, gather all the necessary financial records—like your balance sheet, income statement and detailed records of cash transactions, such as receipts, invoices, loan agreements and bank statements—for the period you’re analyzing.

The more organized your records are, the easier it will be to break down your cash activity and build a reliable statement.

Next, determine how much cash your business generated or used through its core operations. There are two common ways to do this:

1. Direct method: List all cash inflows (like customer payments) and outflows (like rent, payroll and supplies) from operations.

2. Indirect method: From the income statement, begin with the net income, then make adjustments to account for noncash expenses—such as depreciation—and shifts in working capital, including changes in inventory and accounts receivable.

Most small businesses use the indirect method because it ties directly to your net income, making it easier to reconcile with your other financial statements.

Now you are ready to track the cash your business spent or received from long-term investments, including things like:

• Buying or selling equipment, property or vehicles

• Purchasing or selling securities

• Making loans to other businesses or collecting repayments

These are recorded as cash outflows for purchases or inflows for sales or repayments. While investing activities often result in a net cash outflow, that’s not necessarily a bad thing. It can be a positive sign that you’re reinvesting in your business for future growth.

Then, account for cash that comes from or goes toward funding your business, such as:

• Proceeds from loans or lines of credit

• Owner or investor contributions

• Repayment of principal on loans

• Dividend payments or owner withdrawals

Add up the inflows and outflows in this section to get your net cash from financing activities. Once you’ve totaled all three sections—operating, investing and financing—you can calculate your net change in cash for the period. Then, add that figure to your beginning cash balance to determine your ending cash balance.

Once your cash flow statement is complete, consider the following questions:

• Is cash flow from operations consistently positive?

• Are investments being made strategically, or do they strain cash reserves?

• Are you relying heavily on financing, or are you generating enough cash to fund growth?

This step helps you move beyond just recording numbers to understanding what they mean—and using those insights to make smarter decisions. It also prepares you to discuss your cash flow confidently with lenders, investors and financial advisers.

A cash flow statement is just one part of your business’s overall financial picture. And it tells a different story than your income statement or balance sheet. Here’s how income statements and balance sheets differ from a cash flow statement:

• Income statements: Show your business’s profitability over a specific period by tracking revenue and expenses. They often include noncash items like depreciation, which means they don’t reflect how much cash is actually available.

• Balance sheets: Reflect your business’s assets, liabilities and equity at a given moment. However, they don’t show how money moves day to day.

A cash flow statement fills in the gaps. It shows the actual cash coming in and going out of your business. This gives you a real-time look at your liquidity. When used together, all three statements provide a fuller picture to help you make smarter, more confident decisions about managing your business now and in the future.

Understanding how cash moves through your business is crucial for long-term success. A cash flow statement gives you a clear view of your liquidity—showing what’s coming in, what’s going out and where your money is really going. Regularly reviewing your cash flow enables you to anticipate potential issues early, invest more strategically and plan with greater confidence. It also helps you make better decisions when it comes to funding and day-to-day operations.

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