Table of Contents
- Introduction
- What Is a Cash Flow Statement: Definition & Purpose
- The Three Main Sections: Operating, Investing & Financing
- How to Prepare a Cash Flow Statement
- Why CFS Matters: What They Reveal Beyond Profits
- Sample Cash Flow Statement with Simplified Numbers
- Limitations & Common Misunderstandings
- How Atidiv Can Help in 2025
- FAQs
A cash flow statement shows how cash enters and leaves your business over a period, revealing liquidity, financial health, and operational strength. Understanding what is a cash flow statement helps you assess whether your business can meet obligations, invest in growth, and sustain operations.
Introduction
Every business, whether a startup, a growing firm, or a D2C company earning $5M+ revenue, relies on cash. Profits alone don’t guarantee you have liquid funds for payroll, supplier payments, or new investments. That’s where a cash flow statement becomes indispensable. In this blog, you’ll learn what a cash flow statement is, how it works, why it matters, and how you can use it to steer your company toward financial resilience and growth.
What Is a Cash Flow Statement: Definition and Purpose
A cash flow statement, also called a statement of cash flows, is one of the three fundamental financial statements (along with the income statement and balance sheet). It presents all cash inflows and outflows during a given period, such as a month, quarter, or fiscal year, categorized by the nature of the business activity.
The purpose of a cash flow statement is to show your company’s liquidity: its ability to generate and use cash. It helps you understand whether you can meet obligations (salaries, vendor payments, or loan interest), invest in growth, and maintain solvency, even if your income statement shows profits. Because, unlike an income statement (which can include non-cash items like depreciation) or a balance sheet (which is a snapshot on a particular date), the cash flow statement reflects actual cash movements.
At Atidiv, we help businesses build robust accounting systems that capture every cash transaction, giving you real-time visibility into operating, investing, and financing flows.
The Three Main Sections: Operating, Investing, and Financing
A standard cash flow statement is divided into three main sections.
- Operating Activities: This includes cash flows related to core business operations, such as money received from customers, and cash paid for expenses like salaries, rent, utilities, suppliers, and taxes. It also adjusts for non-cash items (depreciation and amortization) and changes in working capital (receivables, payables, inventory).
- Investing Activities: This includes cash used or generated from investments and long-term asset transactions, such as purchasing or selling property, plant, equipment (PP&E), investing in securities, acquiring or divesting subsidiaries or assets.
- Financing Activities: Cash flows from debt or equity financing, such as issuing or repaying loans, raising capital, paying dividends, and repurchasing shares, are included in this section. This shows how you finance operations or growth.
The sum of these three sections produces the net change in cash for the period. Adding that to the beginning cash balance yields the ending cash balance, which aligns with the cash (and cash equivalents) reported on the balance sheet.
How to Prepare a Cash Flow Statement
After understanding what is a cash flow statement, you can prepare your CFS by following these steps:
- Step 1: Gather source financial statements. You typically need your income statement and comparative balance sheets (beginning and end-of-period).
- Step 2: Select a method for operating cash flow:
- Indirect Method: Start with net income, then adjust for non-cash items (like depreciation) and account for changes in working capital (accounts receivable, payable, inventory, etc.). This is the more commonly used method.
- Direct Method: List all cash receipts and payments. This method is more transparent but often more time-consuming.
- Step 3: Calculate cash from investing activities. Sum up all cash spent or received from investments, asset purchases or sales, and long-term asset changes.
- Step 4: Calculate cash from financing activities. Sum up cash received or paid for financing – loans, equity issuance, repayments, dividends, and share buybacks.
- Step 5: Compute net cash flow and ending cash balance. Add cash from operating, investing, and financing. Add that net change to the opening cash balance from the beginning of the period.
Optionally, include supplemental disclosures (for example, non-cash transactions) that can offer deeper insight.
Why Cash Flow Statements Matter: What They Reveal Beyond Profits
A cash flow statement is invaluable because it highlights aspects that profit-based reports might obscure:
- Actual Liquidity and Solvency: Even a profitable business can struggle if cash inflows are delayed or receivables pile up. Cash flow statements show real-time cash availability.
- Quality of Earnings: They reveal whether earnings are supported by real cash inflows or inflated by non-cash accounting entries.
- Financial Flexibility and Decision-Making: Investors, lenders, and management use cash flow statements to judge the capacity to fund operations, repay debt, or invest.
- Comparability Across Companies: Because cash flows exclude accounting methods (like accruals, depreciation methods, or stock-based compensation), they enable clearer comparisons.
- Early Warning Signals: Negative operating cash flow or over-reliance on financing or asset sales may indicate vulnerabilities, even if profit appears strong.
Sample Cash Flow Statement with Simplified Numbers
Here’s a simplified example of what a cash flow statement is for a small business (such as a consumer brand with 3+ employees) over one quarter.
| Section / Activity | Cash Inflows | Cash Outflows | Net Cash Flow |
| Operating Activities | $120,000 | $85,000 | +$35,000 |
| — Receipts from customers | $120,000 | — | +$120,000 |
| — Payments (suppliers, salaries, etc.) | — | $85,000 | −$85,000 |
| Investing Activities | — | $20,000 | –$20,000 |
| — Purchase of equipment | — | $20,000 | −$20,000 |
| Financing Activities | $50,000 | $10,000 | +$40,000 |
| — New loan or capital infusion | $50,000 | — | +$50,000 |
| — Loan repayment | — | $10,000 | −$10,000 |
| Net Change in Cash | +$55,000 | ||
| Beginning Cash Balance | $30,000 | ||
| Ending Cash Balance | $85,000 |
From this statement, you see that while the core operations generated $35,000, the business raised external capital and ended up increasing cash by $55,000, yielding a final balance of $85,000.
Limitations and Common Misunderstandings
Now that you know what is a cash flow statement and how powerful it is, you must understand that these statements are not foolproof. Some limitations and common misunderstandings include:
- Historical View: Cash flow statements reflect past cash movements and not future cash flows. They don’t guarantee future liquidity.
- Non-Cash Items Excluded: They exclude non-cash accounting entries like depreciation, write-offs, or amortization. While this is their strength, it also means that some expense allocations or loss in value are not reflected.
- Inter-Period Timing Issues: Large cash outflows or inflows may distort the perception of regular cash generation when taken in isolation. A single quarter may look healthy, but trending data matters.
- Does Not Indicate Profitability Alone: Positive cash flow doesn’t necessarily mean profitability. Conversely, negative cash flow may result from strategic investments. Always consider all financial statements together.
Understanding these caveats helps you interpret cash flow statements more judiciously.
Atidiv embeds expert finance teams, automates reconciliations, and ensures cash flow statements align with balance sheets and income statements, reducing errors and manual workload. Book a free consultation to learn more!
How Atidiv Can Help With CFS in 2025
Understanding what is a cash flow statement and learning how to read and prepare one are essential for any business aiming for long-term stability and growth. The cash flow statement reveals the real movement of money: how it comes in, how it goes out, and whether your business remains liquid enough to meet obligations, invest, and grow.
When supported by reliable systems, consistent workflows, and expert oversight (like those we provide at Atidiv), cash flow statements become more than just accounting documents. They become strategic tools that guide decision-making, support growth, and protect financial health.
Partnering with Atidiv means you get reliable cash flow reporting and strategic financial insight. This helps you make informed decisions about growth, funding, and investments without worrying about backend reconciliation. With over 16 years of experience and access to a vast network of accounting professionals, we give you an accurate, scalable accounting infrastructure that supports liquidity management, compliance, and financial planning.
If you’re a D2C brand operating in multiple regions like the UK, the US, and Australia and are looking to strengthen your financial operations and ensure accurate, insightful cash flow reporting, we’re here to help.
What is Cash Flow Statement FAQs
1. What is cash flow statement vs. income statement? Are they the same?
No. While the income statement shows profitability over a period (revenues minus expenses), the cash flow statement shows actual cash moving in and out. Profits may be high, but cash flow can be weak if payments are delayed or non-cash items are included.
2. Which method should I use to prepare the operating section – direct or indirect?
The indirect method is most commonly used because it uses net income and adjusts for non-cash and working-capital changes. The direct method lists actual cash receipts and payments and can be more transparent, but it is often harder to maintain.
3. What does it mean if my business has negative cash flow but shows profit?
Negative cash flow may arise due to investments (asset purchases), debt repayment, or the timing of receivables. It isn’t always bad, as it could mean you’re investing in growth, but it requires careful analysis of long-term cash sustainability.
4. Can cash flow statements help in forecasting future cash needs?
Yes. By analysing past inflows and outflows, trends in working capital, and financing patterns, you can model future scenarios and anticipate liquidity needs, investments, or debt servicing.
5. Is a cash flow statement enough to judge a company’s financial health?
A cash flow statement alone isn’t enough to judge a company’s financial health. It must be used alongside the income statement and balance sheet. Together, the three statements give a holistic view: profitability, asset/liability structure, and liquidity.
6. Why should I consider using a service like Atidiv for cash flow management?
We provide end-to-end financial operations, including bookkeeping, reconciliations, cash flow reporting, and analytics, so you get accurate, timely cash flow statements and strategic insights without burdening your internal team.