What is a cash flow statement?
The cash flow statement (or statement of cash flows) is one of the three core [financial statements](/glossary/financial-statements). While the [income statement](/glossary/income-statement) shows profit under accrual accounting, the cash flow statement shows the actual cash generated and spent. A profitable business can still run out of cash, and this statement shows why.
The three sections
- Operating activities: cash from day-to-day trading, such as customer receipts, supplier payments, wages and tax. See [operating cash flow](/glossary/operating-cash-flow).
- Investing activities: buying or selling long-term assets and investments, including [capital expenditure](/glossary/capital-expenditure).
- Financing activities: borrowing and repaying loans, issuing shares and paying [dividends](/glossary/dividend).
Direct vs indirect method
- Direct method: lists actual cash receipts and payments.
- Indirect method: starts with [net income](/glossary/net-income), adds back non-cash items such as depreciation, and adjusts for changes in [working capital](/glossary/working-capital). Most companies use this.
Example (indirect)
Net income $50,000 + depreciation $10,000 − increase in receivables $8,000 + increase in payables $3,000 = operating cash flow of $55,000. If the business spent $20,000 on equipment and repaid $15,000 of loans, net cash flow is $20,000.
Why it matters
It shows whether the business generates enough cash to fund operations, invest and repay debt. Lenders and investors also use it to calculate [free cash flow](/glossary/free-cash-flow).