What Is a Cash Flow Statement?

What the Cash Flow Statement Shows
The Three Sections

A cash flow statement shows the cash that came into and went out of a business during a period, sorted into three groups: operating activities (running the business), investing activities (buying and selling long-term assets) and financing activities (borrowing, repaying and owner funding). It explains why your cash balance changed between the start and the end of the period, which can be very different from your profit.

What the Cash Flow Statement Shows

OpenStax's Principles of Accounting defines it this way: "The statement of cash flows is a financial statement listing the cash inflows and cash outflows for the business for a period of time" (section 16.1, opened October 29, 2026).

It matters because profit and cash don't move together. As OpenStax puts it, "Accrual accounting creates timing differences between income statement accounts and cash." For example, an invoice you've sent counts as revenue but isn't cash until the client pays.

The Three Sections

From OpenStax section 16.2:

Operating activities. Cash flows that "arise from the activities a business uses to produce net income", including "cash sources from sales and cash used to purchase inventory and to pay for operating expenses such as salaries and utilities".
Investing activities. Defined as "cash business transactions related to a business' investments in long-term assets", such as "payments for the purchase of land, buildings, equipment" and cash received when they're sold. See what is capital expenditure.
Financing activities. Defined as "cash transactions related to the business raising money from debt or stock, or repaying that debt", including "principal repayment or redemption of notes or bonds payable".

How to Prepare It (Indirect Method)

OpenStax section 16.3 sets out the operating section in these steps:

"Begin with net income from the income statement."
"Add back noncash expenses, such as depreciation, amortization, and depletion."
"Remove the effect of gains and/or losses from disposal of long-term assets, as cash from the disposal of long-term assets is shown under investing cash flows."
"Adjust for changes in current assets and liabilities to remove accruals from operating activities."

For step 4, OpenStax explains that "Increases in current assets indicate a decrease in cash", for example accounts receivable that hasn't been collected, and "Increases in current liabilities indicate an increase in cash", for example expenses that haven't been paid yet.

Then add the investing and financing sections. The total of all three is the net change in cash, and beginning cash plus the net change must equal ending cash.

Worked Example: A Quarter for a Design Studio

A sample with invented figures: a small design studio's statement of cash flows for one quarter, using the indirect method.

Operating activities

Net income: $30,000.00
Add back depreciation: $2,500.00
Increase in accounts receivable: −$9,000.00
Increase in prepaid insurance: −$1,200.00
Increase in accounts payable: +$1,700.00
Net cash from operating activities: $30,000.00 + $2,500.00 − $9,000.00 − $1,200.00 + $1,700.00 = $24,000.00

Investing activities

Purchase of equipment: −$12,000.00
Net cash used in investing activities: −$12,000.00

Financing activities

Repayment of loan principal: −$8,000.00
Net cash used in financing activities: −$8,000.00

Net change in cash

$24,000.00 − $12,000.00 − $8,000.00 = $4,000.00 increase

Reconciliation

Cash at the beginning of the quarter: $18,500.00
Plus the net change: $4,000.00
Cash at the end of the quarter: $18,500.00 + $4,000.00 = $22,500.00, matching the ending bank balance

What it shows: the studio earned $30,000.00 of net income, but its cash rose by only $4,000.00. Clients still owed $9,000.00 more than at the start of the quarter, and the studio spent $12,000.00 on equipment and $8,000.00 repaying its loan. OpenStax notes that "Free cash flow is calculated as cash flow from operating activities, reduced by capital expenditures", here $24,000.00 − $12,000.00 = $12,000.00.

Where Invoices Fit in Billed

In the worked example, the $9,000.00 increase in accounts receivable was the largest adjustment between profit and cash. In Billed, you give each invoice a due date, and Billed's invoice software page says "Invoice reports show which invoices are paid, partially paid or past due, and you can see who owes you money and send them a payment reminder." Billed's financial reporting page says: "Billed offers several built-in reports: Invoice Reports (paid, partially paid, and overdue), Expense Reports, Income vs Expense Reports, Top Selling Products, and Time Tracking Reports." A cash flow statement isn't among them, so your accountant or accounting software prepares that.

Related Guides

FAQ

What are the three sections of a cash flow statement?

Operating activities, from running the business, such as cash from sales and cash paid for salaries and utilities. Investing activities, from buying and selling long-term assets such as equipment. Financing activities, from borrowing, repaying debt and owner funding.

What is the indirect method?

It starts with net income, adds back noncash expenses such as depreciation, removes gains or losses on selling long-term assets, and adjusts for movements in current assets and current liabilities. In the worked example, $30,000.00 of net income becomes $24,000.00 of operating cash.

How do you check that a cash flow statement is right?

Add the three sections to get the net change in cash. Beginning cash plus the net change must equal ending cash. In the worked example, $18,500.00 plus $4,000.00 equals $22,500.00.

Can a profitable business have less cash than its profit?

Yes. Revenue is recorded when it's earned, not when the client pays, so unpaid invoices raise profit but not cash. Buying equipment and repaying loans also use cash without reducing profit by the same amount.

Does Billed produce a cash flow statement?

Billed's financial reporting page lists five built-in reports, covering invoices, expenses, income against expenses, top-selling products and tracked time. A cash flow statement isn't among them, so ask your accountant or use accounting software for it.

Was this article helpful?

What Is a Cash Flow Statement? A Simple Guide for Small Businesses