Cash flow statement
The third core financial statement — it tracks the actual cash that moved in and out over a period, across operating, investing, and financing activities, and explains the gap between profit and the bank balance.
What cash flow statement means.
The cash flow statement (statement of cash flows) is the financial statement that shows the cash that actually moved into and out of a business over a period, grouped into operating, investing and financing activities, and reconciles the period’s profit to the change in the bank balance.
The SEC’s Office of the Advocate for Small Business Capital Formation, in its one-page guide What is a statement of cash flows?, says it “reflects how cash moves in and out of an entity” and “ultimately reconciles the changes in the entity’s cash balance from the beginning to the end of the reporting period.” It is the third core statement, alongside the profit and loss statement and the balance sheet.
It explains ‘profitable but broke.’
Many businesses are surprised to be profitable on the P&L yet short on cash. The cash flow statement is where that gap becomes visible: profit tied up in unpaid receivables, inventory, loan principal repayments, or owner draws — none of which show on the P&L the way they hit the bank.
It is also the starting point for forecasting — TechBrot’s cash flow management work — and it is only as right as the reconciled books underneath it.
From net income to cash: a worked example.
Illustrative figures, not a client file.
- 01
The quarter
Take a distributor that reports net income of $60,000 for the quarter while its bank balance fell by $15,000. The statement of cash flows accounts for the $75,000 gap.
- 02
Operating, investing, financing
Operating activities: net income of $60,000, plus $5,000 of depreciation (an expense that used no cash), less a $20,000 rise in receivables and a $10,000 rise in inventory, plus a $10,000 rise in payables, for $45,000 of cash from operations. Investing activities: a $25,000 delivery van. Financing activities: $5,000 of loan principal repaid and $30,000 of owner distributions. Net change in cash: $45,000 less $25,000 less $35,000, a $15,000 decrease that matches the bank.
- 03
What the P&L never showed
The van, the loan principal and the distributions do not appear on the P&L at all, and the build-up in receivables and inventory is profit not yet turned into cash. QuickBooks produces the report as the Statement of Cash Flows, working from the changes in balance-sheet accounts — which is why it is only as right as the balance sheet.
How the cash flow statement goes wrong in QuickBooks.
Accounts set up as the wrong type
A loan set up as an expense account, or an owner account set up as a liability, sends cash to the wrong section of the statement or hides it in profit.
An unreconciled balance sheet
Because the statement is built from changes in balance-sheet accounts, a stale receivable, a duplicated payable or an unreconciled loan flows straight into it.
Transfers recorded as income and expense
Money moved between your own accounts entered as revenue in one and an expense in the other, instead of a transfer, inflates operating cash in both directions.
Cash you can plan around
Forecasting from a cash flow statement built on reconciled books is TechBrot’s cash flow management service.
Cash flow statement questions.
What are the three sections of a cash flow statement?
Operating, investing and financing activities. The SEC’s guide describes operating activities as those “generally related to the principal business operations of the entity,” investing activities as those that “arise in connection with the purchase or sale of long-term assets or investments,” and financing activities as those that “directly affect the entity’s owners or creditors due to the entity’s need for financing.”
Why is my net income different from my cash?
Because receivables, inventory, loan principal, equipment purchases and owner draws move cash without moving profit, and non-cash expenses such as depreciation move profit without moving cash. The cash flow statement lists each of those differences.
Profitable on paper but cash is tight?
A QuickBooks ProAdvisor reads your cash flow against your P&L to find where the money actually goes — and what to do about it.
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