What Is a Cashflow Statement?

Cash Flow Statement Definition

A cash flow statement is an essential financial document that shows cash and cash equivalents entering and leaving a company. Cash flow statements are typically published by companies every quarter (3 months) or annually (once a year).

Cash flow statements, income statements, and the balance sheet form the core of a company’s financial statements. A cash flow statement is an important document for companies to publish and inform investors and shareholders about the company's financial condition. Learn about cash flow statements, how they work, and why they are essential for retail investors.

Cash Flow Statement Explained with Examples

Cash flow statements show cash flowing in and out of a company and how this money was spent. As described by Deloitte, the ‘primary objective for presenting a statement of cash flows is to provide relevant information about the cash receipts and cash payments of an entity during a period.’ [1]

Cash flow is defined as the ‘transfer of funds moving into and out of a business.’ American Express recommended thinking of a cash flow statement as a ‘picture of your bank account over time,’ showing money moving in and out. [2] However, unlike your bank statement, a cash flow statement is required by law to be published by a company within a given accounting period.

A cash flow statement is generally split into three sections. These sections should ‘classify cash receipts and payments according to whether they stem from operating, investing, or financing activities.’ [3] An example below, created by the Harvard Business School Online, shows a cash flow statement for a ‘Company A’ for the year ending September 28, 2019: [4]

Source: Harvard Business School Online

As shown in the above example, the statement is presented in three parts: an operating section, investing section, and a financing section. Each section offers detailed financial data on the incoming and outgoing cash of the company within the set period.

However, a cash flow statement is not always presented in the same way. There are two main ways to deliver cash flow statements. The first (as shown above) is the ‘direct method,’ which documents the company's actual cash inflows and outflows. The second way (as shown below) is called the ‘indirect method,’ which uses ‘increases and decreases in balance sheet line items to modify the operating section of the cash flow statement.’ [5]

While the differences are subtle in the presentation of cash flow statements, it is helpful to be aware of the differences and interpret them. The differences between the indirect and direct methods of presenting a cash flow statement are shown below:

Source: Office of the University Controller

One of the most crucial pieces of information from any cash flow statement is whether a company has a positive or negative cash flow. This can be determined by finding out a company’s net cash flow; this is calculated by subtracting its total liabilities (outgoings) from its total cash. The table below shows a simplified summary of the cash statements of two fictional companies, Company X and Company Y:

In this example, Company X had a net cash flow of £12,000 in December 2019. Throughout the period accounted for (December 2019-December 2020), Company X gained £80,000 in operating activities and spent £25,000 and £15,000 through their investment activities and financing activities. This gave Company X a positive net cash flow in the year 2020 of £40,000 (£80,000– £25,000– £15,000= £40,000). Overall, when the positive cash flow from the accounting period is added to the net cash flow documented at the end of 2019, Company X had a positive cash flow of £52,000.

Company X positive cash flow (December 2019-December 2020) = £40,000

Operating activities (£80,000)– investment activities (£25,000)– financing activities (£15,000) = positive cash flow (£40,000)

To work out the overall net cash flow of the company, you can add or subtract the positive or negative annual cash flow to the company’s net cash flow.

Annual positive cash flow December 2020 (£40,000) + previous annual cash flow (£12,000) = Company X overall net cash flow (£52,000)

In contrast, Company Y had negative cash flow in the accounting year to December 2020. While Company Y had a positive net cash flow of £12,000 in December 2019, for the period accounted for (December 2019-December 2020), Company X spent £80,000 in operating activities and gained £25,000 and £15,000 through their investment activities and financing activities. This gave Company Y a negative net cash flow in the year 2020 of £40,000 (–£80,000 + £25,000 + £15,000= –£40,000). Overall, when the negative cash flow from the accounting period was subtracted from the net cash flow documented at the end of 2019, Company Y had a negative cash flow of –£28,000.

Company Y negative cash flow (December 2019-December 2020) = –£40,000

Operating activities (–£80,000) + investment activities (£25,000) + financing activities (£15,000) = negative cash flow (–£40,000)

To work out the overall net cash flow of the company, you can add or subtract the positive or negative annual cash flow to the company’s net cash flow.

Annual negative cash flow December 2020 (–£40,000) + previous annual cash flow (£12,000) = Company Y overall net cash flow (–£28,000)

By understanding how cash flow statements are presented, the information is shown, and how to interpret that information, investors and business owners can use the information to make smarter business and investment decisions. As a publication by the Nebraska Business Development Center reiterated ‘“Cash is King” in keeping a business alive.’ [6]

• Alternate names: Statement of cash flows, statement of changes in financial position, funds flow statement.

Cash Flow Statement vs. Balance Sheet vs. Income Statement

Cash flow statements, balance sheets, and income statements are all important financial documents companies publish. Understanding their importance for companies and interpreting them is a valuable tool for investors, business owners, and shareholders.

What it Means for Retail Investors

Whether investors are bullish or bearish about a company may be based upon a company's most recent cash flow statement. With the right skills and knowledge, these financial statements offer retail investors the opportunity to assess the financial condition of a company or companies. A retail investor can determine whether a company is in a strong financial position or a weak one by analysing a cash flow statement. The statement informs investors and shareholders whether the company is in a good position to pay off its debts (liabilities) or secure further loans or funding.

From retail investors that copy trade to those who use quantitative or qualitative methods or their forms of technical analysis, understanding how to interpret a cash flow statement can enable retail investors to make better decisions about which companies to invest in.

Article Sources

[1] Deloitte, “A Roadmap to the Preparation of the Statement of Cash Flow.” Page 1, Accessed August 25, 2021.

[2] American Express, “What is Cash Flow? Cash Flow Definition, Examples and More.” Accessed August 25, 2021.

[3] Financial Accounting Standards Board, “Statement of Cash Flows.” Accessed August 25, 2021

[4] Harvard Business School Online, “How to Read & Understand a Cash Flow Statement.” Accessed August 25, 2021.

[5] Office of the University Controller, “Cash Flow Statement.” Accessed August 25, 2021.

[6] Nebraska Business Development Center, “Why Cash flow is more important than profit.” Page 1, Accessed August 25, 2021.