What it means
The cash flow statement explains why your cash balance changed over a period. It shows the opening balance, the closing balance, and every source and use of cash in between, sorted into three groups.
Operating activities are the cash effects of running the business, like collecting from customers and paying staff and vendors. Investing activities are buying or selling long-term assets such as equipment. Financing activities are cash to or from investors and lenders: raising money, borrowing, repaying.
Most companies use the indirect method, which starts from net income on the P&L and adjusts it to cash. Expenses that used no cash, like depreciation, are added back. A rise in receivables is subtracted, because revenue was booked but the cash hasn't arrived. A rise in payables or deferred revenue is added, because cash stayed in the bank.
Investing and financing items are listed directly. The three sections together equal the change in cash, which has to match the change on the balance sheet.
Acme pays $6,000 cash for equipment it capitalizes as a fixed asset. On the balance sheet, $6,000 of cash becomes $6,000 of equipment. Net income doesn't see the purchase, and the cash flow statement shows a $6,000 investing outflow.
Over the following years the equipment is depreciated. Each month's depreciation lowers net income, and the operating section adds it straight back, since no cash left the bank. The cash went out once, as investing, on the day of purchase.
The statement is built from the P&L and two balance sheets, so it only ties when both are right. Investors read it to separate operating burn from capital spending and from money raised.
Why it matters. Net income includes plenty that isn't cash: accruals, depreciation, deferred revenue. This statement explains the gap between profit and the change in your bank balance.
The entry, worked
Acme pays $6,000 cash for equipment that it capitalizes as a fixed asset.
| Account | Debit | Credit |
|---|---|---|
| Equipment | $6,000.00 | |
| Cash | $6,000.00 | |
| Total | $6,000.00 | $6,000.00 |
The P&L doesn't move today, but the $6,000 shows up as an investing outflow on the cash flow statement.
Common questions
Why is my net loss smaller than my cash burn?
Usually because cash went out for things not yet on the P&L, such as prepaids, equipment or paying down payables. The cash flow statement shows each item.
Where does fundraising appear?
In financing activities, along with loan proceeds and repayments.
Where do interest and taxes paid go?
Under US GAAP, interest paid and income taxes paid are operating cash flows, as is interest received, and the amounts paid are disclosed. IFRS allows other choices, so check which framework a statement follows.
Where it comes up
The glossary entries, founder guides and lessons on this site that use the term and link here.
- Cash flow statementWhere the cash went in a period, reconciled from net incomeGlossary
- Stock options, 409A valuations and vesting for startupsHow option strike prices are set by a 409A valuation, how vesting and the cliff work, and why ASC 718 makes every grant an expense on your P&L.Guide · 4 min
- How to read an income statement (P&L)Revenue, cost of revenue, gross margin, operating expenses and net income, read line by line, on accrual basis, with the mistakes founders make most.Guide · 7 min
- Cash flow statement explained: why profit isn’t cashHow the cash flow statement starts at net income, adds back non-cash costs and working capital, splits three activities and ties to the balance sheet.Guide · 5 min
- Chart of accounts for startups: a starting templateA starting chart of accounts for a US startup: number ranges, the expense accounts you need, and when to add an account versus a class or tracking tag.Guide · 6 min
- The cash flow statementNorthwind earned $2,550 and its operations consumed $3,100. The third statement is the one that explains the difference, line by line.Lesson 12
Read further
General information for US companies, not tax, legal or accounting advice. Check the specifics with a CPA before you act on them.