A cash flow statement, also known as a statement of cash flow, is a type of financial statement that focuses on the movement of cash in and out of a business. It shows how much cash a company spends and receives, and the sources for both.
The cash flow statement is a major financial record that helps show the health and performance of a business. It displays where and how a company spends its cash, and helps to establish liquidity—how much of its money is readily available to pay its expenses and debt obligations.
The cash flow statement focuses on the use of cash and cash equivalents in a business. These include actual cash, currencies, and short-term accounts and assets that can immediately be spent as cash, or quickly converted to cash if needed.
The cash flow statement consists of three main parts.
Cash flow from operating activities include the money that a company makes and spends while engaging in the core aspects of its business, such as:
Cash from investing activities includes the money gained or lost from a company’s investments, such as:
The cash from financing activities includes paid to or obtained from investors and banks, such as:
Each of these sections will have its own balance, which are then added together to arrive at a company’s total cash flow for the time period in question.
When calculating the operating portion of cash flows, businesses will typically use one of two methods:
Either method is part of generally accepted accounting principles (GAAP), and can be used by businesses, as long as it is used consistently across accounting practices.
The cash flow statement is a useful counterpart to the balance sheet and income statement, since it shows how cash is actually going in and out of a business. It provides another perspective on net income, where revenue and expense numbers may not have been actually paid yet. A business that is liquid is generally regarded as healthier than one that is not, but not all low or negative cash flows are necessarily bad, as they could signal outlays to expand operations.