What is a cash flow statement?

A cash flow statement is a financial report that shows all the cash moving into and out of your business over a set period, grouped into operating, investing and financing activities. It tells you where your cash came from, where it went and how much you have left. That is different from profit, and it gives you a true picture of whether your business can pay its bills.

Whether you are a business owner, an accountant or an investor trying to understand a set of accounts, this guide covers everything you need to know about a cash flow statement. It explains the three sections, walks through a worked example, shows how to read the figures and how a cash flow statement differs from a profit and loss account, and sets out the two ways to prepare one and when your business is legally required to.

What does a cash flow statement show?

A cash flow statement shows the sources and uses of cash within your business over a reporting period, usually a month, a quarter or a year. It sits alongside your balance sheet and profit and loss account to give a complete view of your business's financial health. Rather than showing profitability, it shows liquidity. It answers a very specific question: does your business have enough cash on hand to cover what it owes, right now and in the near future? The statement tracks cash and cash equivalents. Cash means the money in your bank accounts and on hand, while cash equivalents are short term deposits that can be turned into cash quickly with very little risk of their value changing.

A cash flow statement is typically used to:

• Evaluate a company's liquidity position and short term solvency.

• Track how much cash is generated from day to day trading.

• Show lenders and investors how reliably a business converts sales into cash.

• Support cash flow forecasting and financial planning.

What is the cash flow statement formula?

The formula behind every cash flow statement is simple. You add together the net cash from each of the three sections to find the overall change in cash for the period:

Net change in cash = net cash from operating activities + net cash from investing activities + net cash from financing activities

You then add that net change to the cash you held at the start of the period to arrive at your closing cash balance. That closing figure should match the cash shown on your balance sheet at the end of the period, which is how you know the statement is complete. The bottom line figure is your net cash flow. Our guide on how to calculate net cash flow breaks down this formula step by step.

What are the three sections of a cash flow statement?

Every cash flow statement is split into three sections. Each one tracks a different type of cash movement, and reading all three together tells you far more than any single number on its own.

1. Operating activities

Operating activities cover cash generated or spent through your core, day to day trading. This includes cash received from customers, payments to suppliers, wages, rent and other running costs. A positive operating cash flow is generally a strong sign that a business can fund itself from its own trading, rather than relying on borrowing or investor cash.

2. Investing activities

Investing activities cover cash spent on or received from long term assets, such as buying or selling equipment, property or investments. A negative figure here is not automatically a bad sign. It can simply mean the business is investing in growth, for example by buying new machinery or opening a second site.

3. Financing activities

Financing activities cover cash movements between the business and its owners or lenders. This includes raising capital, drawing down and repaying business loans, issuing shares, paying dividends and servicing debt. This section shows how a business is funded and how it manages its relationships with lenders and shareholders. A few items can sit in more than one section. Under UK accounting rules, interest paid can be shown under operating or financing activities, and dividends paid can be shown under financing or operating activities. The key is to choose one approach and apply it consistently from one period to the next, so your figures can be compared year on year.

Cash flow statement example

Here is a simplified worked example showing how the three sections come together for a small trading business over one quarter.

In this example, the business generated healthy cash from trading, invested in new equipment and used a small amount of finance to smooth the impact. The result is a net cash increase of £14,000 for the quarter, which is exactly the kind of figure a lender or investor would look for. If the business started the quarter with £30,000 in the bank, it would close the quarter with £44,000. That £44,000 should match the cash figure on its balance sheet at the end of the quarter.

How do you read a cash flow statement?

The best way to read a cash flow statement is to look at whether each section is positive or negative, and then at what that combination says about how the business is being run. The total on its own can hide a lot, because a healthy looking increase in cash might come from a new loan rather than from trading. These are the patterns to look out for:

• Positive operating cash flow with negative investing and financing cash flow usually means a business is funding its own growth and paying down debt from its trading, which is a strong position.

• Positive operating cash flow with negative investing and positive financing cash flow, as in the example above, often points to a business in a growth phase that is using finance alongside its own cash to invest.

• Negative operating cash flow with positive financing cash flow means the business is borrowing or raising money to cover its running costs, which can work in the short term but is not sustainable if it continues.

• Negative operating cash flow with positive investing cash flow can mean a business is selling off assets to stay afloat, which is often an early warning sign.

It also helps to compare several periods side by side. A single quarter of negative operating cash flow could be down to a large seasonal stock purchase, while three or four in a row point to a deeper problem that is worth tackling early. Our cash flow management tips cover practical ways to turn things around.

Cash flow statement vs profit and loss statement

A cash flow statement shows whether your business can pay its bills, while a profit and loss statement shows whether your business is profitable. They answer different questions and neither replaces the other. A profit and loss account uses accrual accounting, so it records revenue when it is earned and costs when they are incurred, regardless of when cash actually changes hands. A cash flow statement only records money that has actually moved in or out. This is why a business can be profitable on paper and still run out of cash. Large unpaid invoices, upfront stock purchases or seasonal payment delays can all create a cash flow statement that looks very different to the profit and loss account for the same period. Our guide to cash flow vs profit explains this gap in more detail, with a worked example.

Why is a cash flow statement important?

A cash flow statement matters because it shows the real, spendable cash your business has, not just the profit on paper. It gives you and other stakeholders four things a profit and loss account cannot:

• It gives a realistic financial picture, because a business can be profitable but still face cash shortages due to late payments or heavy upfront investment.

• It offers a way to assess sustainability, as consistently positive operating cash flow shows a business can cover its running costs from trading rather than from borrowing.

• It supports better financial planning by highlighting when a cash flow gap is likely to appear, so you can act before it becomes a problem, for example by arranging short term business finance in advance.

• It builds lender and investor confidence, since lenders and investors often review cash flow statements to assess a business's ability to repay debt and generate returns.

Managing cash well also tends to support your business credit score, because a business with healthy cash flow is better placed to pay suppliers and lenders on time. As a business owner, understanding your cash flow statement gives you a much clearer read on your company's financial health and future prospects than the profit figure alone.

What are the different methods for preparing a cash flow statement?

There are two accepted ways to prepare the operating activities section of a cash flow statement, the direct method and the indirect method. Both arrive at the same net figure, but they get there differently. The investing and financing sections are prepared in the same way whichever method you choose.

Direct method cash flow statement

The direct method lists cash receipts and payments from operating activities directly, such as cash received from customers and cash paid to suppliers. It gives a very transparent view of cash flow, but it requires detailed tracking of every cash transaction, which can be time consuming for smaller teams. The worked example above uses the direct method.

Indirect method cash flow statement

The indirect method starts with net profit and adjusts it for non cash items, such as depreciation, and for changes in working capital, such as movements in what customers owe you and what you owe suppliers. It is less granular than the direct method, but it relies on figures you already have from your existing accounts, which is why most small businesses use it.

Using the indirect method, the same business from our example could reach its £23,000 of operating cash flow like this:

• It starts with net profit for the quarter of £24,000.

• It adds back £3,000 of depreciation, because depreciation reduces profit without any cash leaving the business.

• It subtracts £5,000 for an increase in money owed by customers, because those sales count towards profit but the cash has not arrived yet.

• It adds £2,000 for an increase in money owed to suppliers, because those costs reduce profit but the cash has not been paid yet.

• It subtracts £1,000 for an increase in stock, because the cash has been spent on stock that has not been sold.

That leaves net cash from operating activities of £23,000, the same figure the direct method produced. If changes in what customers and suppliers owe are a regular feature of your accounts, our working capital guide explains how to manage them.

How to prepare a cash flow statement

Preparing a cash flow statement involves a clear set of steps to accurately capture how cash has moved through your business over a period.

1. Decide on the reporting period, choosing whether you are preparing the statement monthly, quarterly or annually.

2. Gather your financial data from your balance sheet, profit and loss account and transaction records, making sure everything is accurate and up to date.

3. Identify every cash movement and group it into operating, investing or financing activities.

4. Choose between the direct method and the indirect method for the operating activities section.

5. Total each section to calculate the net cash flow for the reporting period.

6. Reconcile the figures by checking that the total cash flows from all three sections match the actual change in cash and cash equivalents on your balance sheet between the start and end of the period.

7. Review the statement for accuracy and consistency before sharing it with stakeholders, lenders or your accountant.

Following these steps will give you a complete, reconciled cash flow statement and a clear understanding of your cash position for the period. Most accounting software can produce a cash flow statement from your existing records, which saves a lot of manual work once your transactions are categorised correctly.

Do all businesses need to prepare a cash flow statement?

Not every UK business is legally required to prepare a cash flow statement. Under FRS 102, the accounting standard most UK companies follow, a business that qualifies as small does not have to include one in its statutory accounts. Micro entities that prepare their accounts under FRS 105 do not include one either. For financial years starting on or after 6 April 2025, a company counts as small if it meets at least two of these three tests:

• Its annual turnover is no more than £15 million.

• Its balance sheet total is no more than £7.5 million.

• It has no more than 50 employees on average.

A company counts as a micro entity if it meets at least two of these tests: turnover of no more than £1 million, a balance sheet total of no more than £500,000 and no more than 10 employees on average. You can check the updated thresholds on legislation.gov.uk.

Medium sized and large companies are generally required to include a cash flow statement in their accounts, split into operating, investing and financing activities as set out in Section 7 of FRS 102. A subsidiary whose parent includes it in publicly available group accounts can usually claim an exemption, as the group cash flow statement covers it.

Even where it is not a legal requirement, most growing businesses choose to prepare a cash flow statement anyway. It is one of the clearest early warning systems for a cash flow gap, and lenders often ask for one during a funding application regardless of company size. Pairing it with a forward looking cash flow forecast shows you both where your cash has been and where it is heading.

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