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Statement of cash flows: What is it and how to build one for your business

Apr 22, 2019 | 6 minutes read | Running a business

The statement of cash flows is one of the most important financial statements for small business owners. It helps to reconcile the numbers in your bank account with your actual income and spending. It gives you a different perspective on the business’ financial activities so you can better understand how cash moves into and out of your business.

Despite that, most small business owners don’t know what goes into a statement of cash flows orhow to read it. When 30% of small business failures can be traced back to cash flow struggles, that’s a big problem.

That’s why, in this article, we break down the five main aspects of every statement of cash flows and teach you how to better understand the information it gives you. We also share three templates you can use to build and forecast your own statement of cash flows.

What is a statement of cash flows?

Simply put, a statement of cash flows is a record of every transaction where cash changed hands. That means real cash flowed into or out of your bank account, so it doesn’t include things like:

  • Invoices you sent that haven’t been paid yet
  • Invoices you received but haven’t paid

Your statement of cash flows summarizes cash transactions over a set period of time (often a month, quarter, or year), so you get a picture of how cash moves through your business and how irregular income and expenses affect the cash you have available. Your statement of cash flows can tell you things like:

  • How long funds from a small business loan will last you and whether or not your business can sustain itself once you deplete the loan
  • If the payment terms you extend to customers may lead to cash flow problems down the road
  • If you can really afford to invest in new equipment (like a laptop or home office furniture)

How does the statement of cash flows relate to the profit & loss statement and balance sheet?

Other financial statements, like your profit & loss (or income) statement and balance sheet, include transactions that don’t actually affect the balance in your bank account (or don’t affect it yet).

The net income reported on your profit & loss statement, for example, includes revenue you earned but haven’t received yet. The total cash listed on your balance sheet gives only a snapshot of your cash balance on a particular day—it doesn’t help you understand how that number changes based on business activities.

Your statement of cash flows takes information from both of those financial statements and reconciles it with the money flowing into and out of your actual bank account—so it gives you a different perspective on the business’ financial health.

Sections of the statement of cash flows

The statement of cash flows looks different, and varies in complexity, from one business to another because your spending and revenue are unique to you. That said, every statement of cash flows involves five main components:

  • Net income (which is taken from your Profit & Loss or Income Statement)
  • Operating cash flow
  • Cash flow from investing
  • Cash flow from financing
  • Net cash flow

Net income

Net income is one of the financial terms most familiar to business owners. You may also call it “profit” or your “bottom line.” You’ll find net income listed on your Profit & Loss (Income) Statement, and it’s calculated by subtracting your business expenses from total revenue or sales.

Every statement of cash flows starts with net income—but net income includes transactions that don’t involve cash changing hands. That’s why the rest of your cash flow statement will adjust your net income to account for non-cash transactions like depreciation, revenue earned but not yet received, and expenses incurred but not yet paid.

Cash flow from operations

The next section of your statement of cash flows is often the most important section for smaller businesses. Cash flow from operations is one of the best indicators of your business’ financial health. It summarizes the cash flow that happens from your actual business operations—from your business doing the thing your business does every day.

For example, if you’re a freelance graphic designer, this section records the money you earned and expenses you incurred by regularly doing graphic design for clients.

The operating cash flow section includes things like cash inflow from invoice payments and cash outflow to cover:

  • Cost of goods sold (COGS)
  • Marketing and advertising
  • Employee salaries or payments to contractors
  • Other overhead and administrative expenses

In our example of a freelance graphic designer, her net cash flow from operations for the quarter may look like this:

[$10,000 in paid revenue] – [$0 in COGS] – [$100 spent on marketing] – [$700 paid to a virtual assistant] = Net Cash Flow from Operations of $9,200

Cash flow from investing

The next section of the statement of cash flows summarizes the investments your business has made—either into itself or into other businesses. It doesn’t involve investments someone else makes into your business (those are recorded in the financing section).

For example, if you invest in a new laptop, that expense is categorized as a cash outflow for investing in the business.

This section is important because it can help explain deviations in your normal cash flow. In the month you purchase that laptop, your net cash flow may be lower than normal—but you know that isn’t cause for concern because the cash was used to invest back into the business. If a faster computer makes you more productive, it may even increase net cash flow in the future.

On the flipside, if you previously purchased office space and you decide to sell it, the income from that sale goes in this section, too. In that case, understanding that that revenue isn’t part of your typical cash inflow can help you better predict future cash flow and manage your spending accordingly.

Cash flow from financing

Cash flow from financing is the third and final body section of the statement of cash flows. This is where investments other people or businesses make in your business are recorded. In other words, it summarizes cash transactions that involve raising, borrowing, and repaying capital.

For example, if you take out a small business loan, that cash inflow adds to your net cash flow from financing. The same goes if your startup receives venture capital funding or small business grants. As you repay business loans, it lowers your cash flow from financing. As your business grows, if you sell shares or pay dividends to shareholders, those activities are recorded in this section, too.

Going back to our freelance graphic designer example, let’s say she decides to turn her one-woman shop into an agency—and takes out an SBA loan to hire two graphic designers to work with her. The cash she receives from the loan will increase her net cash flow from financing. Later on, she’ll have to repay that loan, and those payments will be recorded in the same section—reducing net cash flow from financing.

Net cash flow

Every statement of cash flows concludes with net cash flow, which represents your change in cash flow over that time. Did you earn more cash than you spent? It’s calculated by adding:

Net Cash Flow = Net Cash Flow from Operations + Net Cash Flow from Investing + Net Cash Flow from Financing

It’s important to note that your net cash flow isn’t the same as the total cash you have in the bank. It’s a measurement of the change in cash over a given period, and it can be positive or negative. Negative net cash flow doesn’t (necessarily) mean you’re broke or you can’t pay your bills—because it doesn’t take your existing cash balance into account.

For example, if you have:

  • $12,000 in the bank at the beginning of the quarter
  • Net cash flow of –$2,000

You still end the quarter with $10,000 in the bank. That $10,000 is known as “total cash” and it’s included on your balance sheet.

Cash flow statement templates

If you’re already using Wave for your business’ accounting, finding your Statement of Cash Flows is as easy as logging in and going to Reports > Cash Flow.

Here’s the thing: Understanding your past and current cash flow is great, but you also need to project future cash to ensure any upcoming cash flow crises are dealt with before they hit.

To do that, you can build your own cash flow statement to forecast cash flows for the future. If that sounds intimidating, it doesn’t have to be—a cash flow statement template provides you with a pre-made document to record both past cash flow and project future cash flow.

Here are three of our recommendations for a cash flow statement template for your business:

1. Wave

Since Wave customers have access to their statement of cash flows right from their dashboard, our cash flow statement template is focused on forecasting future cash flows.

Here’s what it looks like:

We simplified the rows to income and expenses our customers commonly experience, while leaving space for any more unique cash flows you may have. All you have to do is fill in the cash inflows and outflows you expect for each month, and the green boxes will automatically calculate your cash position.

2. Smartsheet

Smartsheet offers more than one cash flow statement template to choose from, including:

Smartsheet’s Simple Cash Flow template focuses on operating cash flow.

3. Microsoft Office

Microsoft Office’s statement of cash flows template is designed to be seen. It’s a good option if you’re seeking funding from a bank or venture capitalist because it showcases the most important information in a clean and professional template—even illustrating cash flow over time on a trendline.

Understanding the statement of cash flows

When you look beyond the numbers and accounting jargon, your statement of cash flows is a simple calculation of the financial health of your business.

Are you bringing in more cash than you spend? That’s what performance comes down to for many small business owners—and understanding your Cash Flow Statement is one way you can take ownership of those numbers and build long-term financial health and business success.

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