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The Importance of a Cash Flow Statement (and What It Tells You)

June 6, 2025

A cash flow statement documents in detail all company income and debt over a specific period of time. It reflects the short-term viability of a company by indicating whether it has enough cash on hand to pay its employees and debts. If it does, then the company is considered to have a “positive” cash flow. The cash flow statement shows the company’s cash inflows and outflows, highlighting its financial health and liquidity.

Here’s What We’ll Cover:

Components of a Cash Flow

Cash Flow Statement Example

How Do You Calculate Cash Flow?

Analyzing Cash Flow Statements

Why Cash Flow Statement Is Important

FAQs about cash flow statements

How Is Cash Flow Different from Income Statement?

Is Cash Flow a Profit?

A cash flow statement, sometimes called a statement of cash flows or flow statement, is a key financial statement that tracks how cash and cash equivalents move in and out of a business over a specific period. By breaking down cash flows into operating activities, investing activities, and financing activities, the cash flow statement provides a clear picture of how changes in balance sheet accounts and income impact a company’s liquidity.

This focus on the actual flow of cash helps business owners and stakeholders assess the company’s financial health and its ability to generate enough cash to cover expenses, invest in growth, and meet financial obligations. Understanding cash flow is essential for making informed decisions and ensuring the long-term stability of any business.

Components of a Cash Flow Statement

A typical cash flow statement is divided into three main sections, each highlighting a different aspect of a company’s cash flows: operating, investing, and financing. These three sections represent the main cash flow activities analyzed in the cash flow statement.

1. Operating Activities

refers to the cash generated or used by a company’s core business operations. It includes both the costs directly related to producing and selling products, and the income from those sales. This section captures cash inflows from customers and outflows to suppliers and employees, as well as other routine transactions impacting net income. To reconcile net income with actual cash flow, adjustments are made for non-cash expenses like depreciation.

Purchase of raw materials
Building Inventory
Advertising
Cash payments to vendors
Payroll and employee benefits’ payments (including cash payments to employees)
Cash receipts from customers
Dividends from company investments
Interest received or payed (including interest expense as part of operating activities)
Income taxes & deferred taxes
Income from sales of products or services
Depreciation and other non cash items, which are adjusted for when calculating operating cash flows
Sale of non-current assets

2. Investing Activities

Investing Activities in accounting refer to cash flow from investing activities, which include:
Here, the statement reports cash flows related to the purchase or sale of long-term assets like property, equipment, and investments. These activities show how much cash is being used for or generated from investments that support the company’s future growth.

Long term investments (for example, purchase or sales of stocks and bonds, or other financial assets)
Properties and equipment (purchases or sales of)
Purchases and sales of financial assets such as stocks, bonds, and other investments
Loan payments (but not interest. Interest on bank loans would go under ‘Operating Activities’ above)
Money loans
Costs related to payments for business acquisitions, which are a key component of investing activities
Cash inflows from a company sold or from the sale of long-term assets are also part of cash flows from investing

Although a business can generate cash flow by selling properties and equipment, those specific costs are not an indication of a profitable business.

To calculate cash flows from investing, you include transactions related to long-term assets and exclude debt-related activities.

3. Financing Activities

This section covers cash flows from transactions involving debt and equity financing. Examples include cash received from issuing stock or bonds, cash paid to repay loans, and dividend payments to shareholders. These activities reflect how a company raises cash and manages its capital structure. These activities refer to:

Incoming cash from investors and shareholders
Incoming cash from issuing debt (for instance, bonds)
Outgoing cash in the form of dividends
Repurchasing of stock
Proceeds from employees exercising stock options
Capital lease (a large expense, such as a building that is being accounted for over a number of years).

By presenting these components, the flow statement not only shows where cash is coming from and going to, but also reconciles net income with net cash flow, helping users identify the impact of non-cash expenses and changes in working capital.

Cash Flow Statement Example

To better understand how a cash flow statement works, let’s look at a simple cash flow statement example. Imagine a company’s flow statement for the year shows the following:

Operating activities: Generated $940,000 in cash flows from operating activities, reflecting cash inflows from sales and cash paid for expenses.
Investing activities: Used $28,000 in cash flows for investing activities, such as purchasing new equipment.
Financing activities: Provided $9,500 in cash flows from financing activities, including proceeds from a new loan.

Adding these together, the net change in cash for the period is $56,500.

Then by adding the Beggining Cash Balance $27,200 the Ending Cash Balance is $83,700

This example demonstrates how the cash flow statement brings together all sources and uses of cash, giving a comprehensive view of the company’s cash position and financial performance.

How Do You Calculate Cash Flow?

There are two methods to calculate cash flow: the direct and indirect methods. These methods offer different approaches to calculating cash flow from operating activities, and are both recognized in financial reporting under generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). When calculating cash flow, the direct method involves tracking actual cash inflows and outflows, while the indirect method adjusts net income to calculate cash flows. Companies may choose between the direct and indirect methods based on their reporting needs and industry practices.

1. Direct Method

The accounting department of a company records each cash transaction, such as cash receipts and cash payments, when using the direct method.

This method only includes actual cash movements and does not include cash equivalents or other assets that are not cash. This is the universally recommended way to calculate cash flow because the expenses and income are so detailed. That detail can help a company to better make financial decisions.

2. Indirect Method

The accounting department takes net income and then makes adjustments for non cash transactions and non cash items to reconcile net income with actual cash flow from operating activities.

This is considered an easier method to calculate than direct, because of the way accounting departments typically record transactions.

Analyzing Cash Flow Statements

By examining the flow statement, users can assess the company’s ability to generate operating cash flow, manage cash outflows, and fund future growth through investing or financing activities. For example, consistent negative cash flow from operating activities may signal underlying business challenges, while significant cash outflows for investing activities could indicate expansion or asset upgrades. Reviewing financing activities helps determine how the company is raising cash and managing debt or equity. Careful analysis of cash flow statements allows stakeholders to predict future cash flows, identify potential liquidity issues, and evaluate the overall financial performance and stability of the business.

Why the Cash Flow Statement Is Important

If a company can continuously generate more cash (than it is spending), then it can use that cash to:

Increase the size of dividend payments to investors
Attract shareholders
Reinvest in the business
Buy stock
Reduce Debt
Acquire other companies

A company’s cash flow determines its ability to reinvest, pay dividends, and acquire financial assets for growth. With strong cash flow, a business can invest in financial assets such as stocks and bonds, supporting long-term expansion and stability.

A cash flow statement is considered to be one of the four most important financial statements a company can generate when doing a financial analysis, the other three being:

Balance sheet
Income statement
Statement of Changes in Equity

FAQs about cash flow

Is Cash Flow a Profit?

Cash flow is not profit.

Profit is what a company has left over after all expenses have been paid.

Cash flow is the available cash a company has on hand at any given time (which is based on income and expenses). A cash flow statement will indicate whether a company is viable, meaning it can continue operating and making profits.

How Is Cash Flow Different from Income Statement?

An income statement is concerned with revenues, gains, expenses and losses in both the operating and non-operating activities of the business during a specific period of time. It does not deal directly with cash.

A cash flow statement is concerned with showing the cash coming in and going out of a business as it relates to operating, investing and financing activities – also during a specific period of time.