What Is a Cash Flow Statement?

Kyle Delicata, Relationship Manager, First Republic Bank
December 8, 2021

Running a successful business means keeping an eye on your company's cash management. And as a business owner, managing your cash means you can pay bills in a timely fashion, better understand your business's working capital and stay financially solvent. A cash flow statement is an essential tool to help you do this. 

A cash flow statement (also called a statement of cash flows) outlines how cash moves in and out of your business (cash inflows and cash outflows), allowing you to easily track how money is spent and the sources of cash received. It’s just one of several reports you need to assess your financial situation, but it’s an essential financial statement for any company. In fact, many businesses have been obligated to create them since the late 1980s under the generally accepted accounting principles in the U.S.

Understanding cash flow statements not only will help you make more informed decisions about your company’s spending but also proves useful when you go to secure financing. Read on to learn what a cash flow statement is, how to read a cash flow statement and how to use them to guide your business’s growth. 

Cash flow statement definition

A cash flow statement is a report that outlines how cash — and cash equivalents — is entering and exiting the business. Cash typically comes in from sales, proceeds from investments and from investors or financial institutions. Cash exiting the business includes expenses, like payroll and income tax payments, cash paid for investments and payments to investors or financial institutions. 

A good cash flow statement example is one that takes the form of an itemized list summarizing every transaction during which cash flowed in or out of the business. It contains three sections: cash flow from operating activities, as well as cash flow from investing and financing activities. 

The statements are compiled regularly: monthly, quarterly, annually or some combination of the three, using the direct method or indirect method. As one of four main financial reports that U.S. businesses generally create, a cash flow statement helps provide a snapshot of the financial health of the business. 

Types of Financial Statements

Many businesses in the United States issue the following four financial statements:

  • Balance sheets: A statement of the business’s financial condition, a balance sheet provides insight into a business’s assets, liabilities and equity. 
  • Income statements: An income statement provides insight into a business’s financial performance over a set period of time and outlines its revenue and expenses. 
  • Cash flow statements: Cash flow statements report on how cash flows into and out of the business. 
  • Statement of owner’s/shareholders’ equity: The owner’s equity statement presents how much of the business’s earnings are retained by the company, as well as transactions with owners including contributions from or payments to owners.

 How to read a cash flow statement

Cash regularly moves in and out of a company. The purpose of a cash flow statement is to illuminate where a business’s money is going and where it’s coming from. This is different from net income, which demonstrates how much profit a company has earned for a specific period of time. 

The cash flow statement format includes multiple parts, and you’ll need to understand each to read and interpret the report.

Each cash flow statement contains these three sections: 

  • Cash flow from operating activities: Outlines how cash moves in and out of the business as a result of its day-to-day operations. Transactions in this section include sales of goods or services, as well as expenses like services, supplies, payroll and other day-to-day expenses 
  • Cash flow from investing activities: Outlines how cash moves in and out of the business through the sale and purchase of investments. If a company purchases or sells an equity investment of another entity this could be considered an investment
  • Cash flow from financing activities: Outlines cash moving in and out of the business due to financing. This can include cash received from investors or paid out to shareholders, money received from a loan or a line of credit or money used for debt repayment 

Together, the three sections provide a snapshot of how money is being used in the business over a period of time. However, a cash flow statement should be considered alongside other key financial statements when assessing a company's financial health. 

Why are cash flow statements important, and how are they used?

The importance of cash flow statements runs deeper than being a mandatory requirement for certain companies in the United States: they have several benefits, both for business owners and for investors alike. 

For one, cash flow statements provide insight into where a business’s money is coming from and how it’s being spent. Preparing and analyzing a business’s cash flow statements can help business owners identify issues that might be inhibiting cash flow, set budgets or make future projections. Overall, cash flow statements can help business owners determine whether their business has sufficient cash flow to manage their debts and other expenses.

A cash flow statement is also crucial to attracting investors or securing business financing. Together with other key financial documents, cash flow statements help financial institutions and investors assess your business’s financial health and make informed decisions about investing and lending activities. 

Personalized business banking solutions from First Republic Bank

Understanding cash flow statements, as well as cash flow as a general concept, can make gauging the financial health of your business easier to do. A strong understanding of your business’s cash flow can also help when you start seeking financing, as cash flow statements are one of several documents investors and banks will use to evaluate your business.

Finding a reliable banking partner can help you feel more confident in your business finances, as well as help you make informed financial decisions regarding your business. 

First Republic is here to help. Learn more about how our team can support your business through customized solutions and support, and help you achieve your business goals.

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First Republic does not provide tax or legal advice. Clients should consult their own attorneys or other tax advisors.