What Is a Cash Flow Statement? Definition, Purpose & How to Read It

What is a cash flow statement?

A cash flow statement is a financial report that shows how money moves in and out of a business over a specific period of time.

It tracks the actual cash generated and spent by a company, unlike the income statement, which includes non-cash items like depreciation.

The goal of a cash flow statement is to show how well a company manages its cash to fund operations, pay debts, and invest in future growth.

Components of a cash flow statement

The report is divided into three main sections:

• Operating activities - cash earned or spent through core business operations, such as sales, supplier payments, or wages.
• Investing activities - cash used for or received from buying or selling assets, like equipment, property, or investments.
• Financing activities - cash flows from borrowing, repaying loans, issuing shares, or paying dividends.

The statement reveals whether a company is generating enough cash to sustain itself, invest in new opportunities, and meet its financial obligations.

It provides a clear picture of a company’s liquidity and financial resilience, helping owners, investors, and accountants understand how money truly moves through the business.

What is the purpose of a cash flow statement?

The purpose of a cash flow statement is to show how cash moves through a business; where it comes from, how it’s used, and whether the company has enough liquidity to meet its financial obligations.

While the income statement measures profitability, and the balance sheet shows what a business owns and owes, the cash flow statement focuses specifically on cash liquidity, that is, how much actual money is available to run daily operations, invest, and repay debts.

For accountants and business owners, this report serves several purposes.

It assesses liquidity by revealing whether a company generates enough cash to cover short-term expenses like payroll, rent, and suppliers.

It evaluates financial health by highlighting if a company relies too heavily on external financing or is successfully generating cash through operations, and also supports decision-making for investors and managers who use it to judge whether a business can afford new investments, repay loans, or distribute dividends.

Additionally, it ensures transparency by tracking real cash movement rather than accounting profits, providing a more accurate reflection of how efficiently a business manages its resources.

How to read a cash flow statement

Reading a cash flow statement means understanding how money moves in and out of a business over a specific period.

Here’s a step-by-step process of how to do it:

1. Start with operating activities

This section shows how much cash the business generates from its core operations; essentially, how well it’s turning revenue into cash.

It includes cash received from customers as well as cash paid to suppliers, employees, and for operating expenses.

If the net cash from operating activities is positive, it means the company’s daily operations are bringing in more money than they’re spending, a good sign of stability.

If it’s negative, it could indicate inefficiencies, slow-paying clients, or high expenses that may require attention.

2. Review investing activities

This part covers cash spent on or earned from long-term investments, such as buying or selling property, equipment, or securities.

For instance, if a business buys new equipment, it will appear as a cash outflow, and if it sells an asset, that’s a cash inflow.

Negative cash flow here isn’t necessarily concerning, it may mean the company is investing in future growth, but consistently high outflows without returns can be a warning sign.

3. Examine financing activities

This section reflects how the company funds itself; through loans, investor contributions, or paying dividends.

Cash inflows might come from issuing shares or borrowing money, while outflows might result from repaying loans or paying dividends to shareholders.

A healthy business often shows balanced financing cash flow, using financing strategically without over-relying on debt.

4. Check the net cash flow and ending balance

At the bottom, you’ll see the net increase or decrease in cash for the period. This figure shows how the total of all three sections affects the company’s overall cash balance.

Finally, compare the ending cash balance with the balance sheet to ensure consistency, both should match.

5. Look for trends over time

A single cash flow statement is useful, but comparing several periods reveals more, such as whether cash flow from operations is improving, if investment is paying off, or if debt levels are increasing.

To read a cash flow statement effectively, look for where cash is coming from, where it’s going, and whether the business is generating enough from operations to sustain itself without relying too heavily on selling assets or borrowing money.

How to prepare a cash flow statement

Preparing a cash flow statement involves organizing all cash-related transactions from your accounting records to show how money has moved through your business during a specific period.

There are two main methods used to prepare a cash flow statement; the direct method and the indirect method.

Most accountants and accounting software use the indirect method, as it starts from the net income figure found on the income statement.

Here is a step-by-step process on how to prepare a cash flow statement:

1. Gather the necessary financial data

Start by collecting the income statement and balance sheets for the current and previous periods.

These documents will help identify changes in assets, liabilities, and equity, all of which affect cash flow.

2. Calculate cash flow from operating activities

If you’re using the indirect method, begin with net income from the income statement, then adjust for:

Non-cash expenses such as depreciation and amortization, which reduce profit on paper but don't involve actual cash outflow, so they're added back.

Next, account for changes in working capital; increases in current assets, like accounts receivable or inventory, use up cash while increases in current liabilities, like accounts payable, generate cash.

The result is your net cash flow from operating activities, showing how much cash your business generated or used through its core operations.

3. Determine cash flow from investing activities

This section includes transactions related to the purchase or sale of long-term assets; that is cash outflows from buying property, equipment, or investments, and cash inflows from selling those same assets or receiving investment income.

These activities reflect how the business invests in growth or liquidates assets.

4. Calculate cash flow from financing activities

Record any transactions involving the company’s funding and capital structure, such as cash inflows (issuing shares, taking out loans) and cash outflows (repaying loans, paying dividends, or buying back shares).

This section shows how the company raises and repays capital.

5. Compute the net change in cash

Add up the net cash flows from operating, investing, and financing activities.

The result represents the net increase or decrease in cash for the period.

Finally, add this figure to the opening cash balance (from the start of the period) to arrive at the closing cash balance, which should match the cash figure on your ending balance sheet.

In practice, accounting software like Eleven, can automate most of this process by pulling data directly from your ledger, classifying transactions, and generating real-time cash flow reports with minimal manual work.

How can software help with a cash flow statement?

Accounting software can make preparing and managing a cash flow statement far more efficient, accurate, and insightful, especially for accounting firms or growing businesses handling multiple clients.

Tools like Eleven automate much of the work that traditionally takes hours of manual reconciliation, ensuring every inflow and outflow is properly tracked and categorized.

One of the biggest challenges in creating a cash flow statement is gathering and organizing transaction data across different accounts.

Eleven’s automated bookkeeping and real-time general ledger solve this by continuously recording every financial transaction as it happens, from invoices and payments to expenses and bank movements.

This ensures the cash flow statement is always based on up-to-date, accurate information.

Because Eleven integrates automated accounts receivable and accounts payable, it also helps you see exactly when and where cash is entering or leaving the business.

For example, delayed client payments or early supplier settlements are reflected automatically, giving accountants a precise view of cash flow without the need for manual adjustments.

Another key advantage is Eleven’s multi-entity and multi-currency support, which simplifies consolidated cash flow reporting for firms managing several clients or subsidiaries.

Instead of manually combining figures from separate ledgers, users can generate unified statements that accurately reflect cash movements across all entities, even when working in different currencies.

Additionally, Eleven’s custom dashboards and reporting tools let you visualize cash flow trends in real time.

You can quickly identify periods of strong inflows, upcoming cash shortages, or spending patterns, allowing for proactive financial management rather than reactive problem-solving.