What Is a Cash Flow Statement? (Plus Examples and FAQs)

By Indeed Editorial Team

Published 19 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Cash flow is an important part of keeping a business running. Accountants and other finance professionals may monitor cash flow closely to keep companies profitable. Learning about cash flow can help you better understand how a business functions. In this article, we explain what a cash flow statement is, describe the different elements of one, provide an example of such a statement and share answers to frequently asked questions about cash flow.

What is a cash flow statement?

A cash flow statement is a document that shows the movement of money out of and into a business. Organisations use cash flow to analyse their financial situation and help prepare for the future. In a more general sense, it's like balancing a chequebook. You have deposits, or money going into your account, and withdrawals, or money coming out of your account. For individuals and businesses, positive cash flow means that you have enough money to cover expenses or debts without overdrawing the account.

Why is cash flow important?

Cash flow not only helps to keep a business running but also helps prepare the organisation for future expenses or changes in the economic climate. This type of statement may help an organisation decide on future endeavours, such as business acquisitions, employee recruitment and additional benefits for the firm. For example, a positive cash flow may allow a company to expand its operation to a new region or hire several new employees.

Categories of activities on this type of statement

Here is a further explanation of a cash flow statement divided into three sections:

1. Operating activities

These are the activities that are the core business activities. For example, if you sell a product, then the production, sales and delivery of the product are operating activities. It also includes payment from customers, the purchase of inventory, your accounts payable and company payroll. Other items included are depreciation on equipment or other tangible assets, amortisation of intangible assets and deferred tax.

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2. Investing activities

This type of cash flow includes purchases or sales of assets, such as land, buildings, equipment or marketable securities. It can also include loans to suppliers or received from customers and payments from mergers or acquisitions. Investing activities may result in positive cash flow if they provide a positive return on investment or a negative cash flow if they don't.

3. Financing activities

Financing activities are an important way to exchange cash in and out of a business. This includes cash from investors and cash to shareholders in the form of dividends. It can also include activities that may affect the long-term liabilities and equities of an organisation, such as the sales or repurchase of company stock.

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Types of cash flow

Below are some specific types of cash flow seen on a financial statement:

  • Net present value: This is the value of a business using discounted cash flow.

  • Liquidity: This is used to determine how well a company can meet its financial obligations.

  • Cash flow per share: This is your after-tax earnings divided by outstanding shares.

  • Cash conversion ratio: This measures the amount of time between when a business pays for inventory and receives payment from a customer.

  • Cash flow from operating activities: This is the cash generated from the main business activities of the company and doesn't include investment income.

  • Funding gap: This is how much cash a company needs to overcome a shortfall.

  • Dividend payments: This type of cash flow is used to pay dividends to investors.

  • Capital expenditures: This is how much cash flow is used to reinvest in a business.

  • Free cash flow to equity: This is the cash flow from operating activities minus the capital expenditures.

  • Free cash flow to the firm: This measurement assumes that a company has no debt and uses it for the valuation of a company.

  • Net change in cash: This is the difference in cash flow from one accounting period to another.

Cash flow example

Here's an example of a cash flow statement:

Cash flow from operations $700

Sales $1,000

Taxes ($300)

Totals

Cash flow from investments ($200)

Capital Purchased ($200)

Cash flow from financing $1,500

Loan (Outgoing) ($500)

Loan (Incoming) ($2,000)

Total $2,000

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Frequently asked questions about cash flow

Here are answers to several frequently asked questions about cash flow:

What is the difference between cash flow and net income?

The difference between cash flow and net income is the timing of when money enters and leaves a business. Net income measures annual income and all the money that goes in and out of a business, such as dividends, interest on debt and other operating activities. Cash flow measures the movement of money that's flowing in or out of a business annually.

What is the formula for converting profit into cash flow?

The formula you can use to convert profit into cash flow is the following:

  • Net cash flow = net profit + depreciation - accounts receivable - increases in inventory + accounts payable - decreases in bank loans/financing

You can use this formula to determine if positive cash flow results in a higher profit margin.

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What are some ways to preserve cash flow?

There are many strategies you can employ to preserve cash flow:

  • collecting payments from customers as soon as possible

  • negotiating an early payment date that is within 30 days of delivery

  • waiting to order new inventory when it's on sale or when you're close to running out of stock

  • negotiating a higher percentage of payment upfront before you begin work

  • lowering your prices so that the customer can pay more upfront in the form of down payments and payment at delivery

  • getting a longer duration for loans so that you can spread out payments over time

Is it important to keep good records of cash-related activities?

It's important to keep a good record of a company's financial information and billings, invoices, receivables and other accounting documents. This information may be essential for tax filing, audits and for analysing the success of a business. Your team can hire an accountant to track and manage this information.

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What is positive and negative cash flow?

There are two types of cash flow: positive and negative. Positive shows that there is more money coming into the company than going out of it. Negative cash flow occurs when the amount that goes out of a business is more than that's coming into the business. This may be due to cash being paid as compensation, sales tax and other expenses going out of the operation that aren't part of revenue generation.

What are some examples of cash equivalents?

Some examples of cash equivalents are:

  • treasury bills

  • treasury notes

  • commercial paper

  • certificates of deposit (CDs)

  • money market accounts

  • cash management pools

What is the difference between a cash flow statement and a balance sheet?

The difference between a cash flow statement and a balance sheet is how you categorise the cash inflows and outflows. Cash flow measures money coming into or going out of a business annually. A balance sheet tracks all of a company's assets, liabilities, equity and other financial transactions in one very concise report.

What is the difference between debt and equity?

There are two types of debt: common and preferred. Common debt happens when there are multiple investors that make up the company. This includes bonds, notes or other forms of debt, such as commercial paper, which you pay back with interest but have no claim to ownership of the business.

What is diversification and why can it be part of a company's cash flow analysis?

Diversification encompasses several ways to go about building wealth with different forms of investments by using bank loans, bonds, preferred shares or commercial paper. You can diversify by using different investments, such as commercial paper, bonds and notes. This is a good way to broaden your investment portfolio.

What are some examples of expenses on this type of statement?

Some examples of expenses on this type of statement include:

  • advertising and marketing

  • accounts payable and receivable

  • depreciation and amortisation

  • equipment purchases or upgrades

  • general and administrative costs (G&A) or selling, general and administrative costs (SG&A)

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