- What is a cash flow statement?
- Why cash flow statements are important
- Cash flow statement vs. income statement vs. balance sheet
- Components of a cash flow statement
- Cash flow statement example
- How to calculate cash flow with the direct vs. indirect method
- How to prepare a cash flow statement
- How to interpret your cash flow statement
- Limitations of a cash flow statement
- Build accurate cash flow statements faster with Ramp
A cash flow statement tracks the cash moving into and out of your business over a set period, grouped into operating, investing, and financing activities.
Even healthy businesses can struggle with cash timing issues like delayed customer payments and sudden expenses. Without reliable cash visibility, it's hard to stay ahead of upcoming obligations or know when to invest.
A cash flow statement helps you anticipate cash needs before they become problems and strengthens your financial planning. A complete cash flow statement example, read line by line, shows you how to build and interpret your own.
Get Ramp's Free Cash Flow Statement Template
What is a cash flow statement?
A cash flow statement shows how much cash moves into and out of your business during a set period. It helps you understand whether you can cover expenses, invest in growth, and manage day-to-day operations without relying on external funding.
Company leaders, lenders, investors, and auditors use cash flow statements to assess financial health and risk. Because it's a required financial report under ASC 230 and IAS 7, the statement also ensures your accounting practices follow established reporting standards.
Beyond compliance, a cash flow statement gives you visibility into future cash positions, upcoming funding needs, and the timing of major purchases or payments. Clear insight into cash movement helps you plan more confidently and support long-term financial stability.
Why cash flow statements are important
Cash flow visibility goes beyond meeting compliance requirements. It tells you whether your business can cover its obligations, fund growth, and avoid cash crunches that force difficult decisions. Without it, you're relying on revenue figures that may not reflect your actual cash position. A two-person design studio, for example, can book $6,000 of profit in a month and still collect only $4,800 of operating cash if $2,500 of client invoices are unpaid.
Regular cash flow analysis helps you spot patterns before they become crises, from seasonal dips in collections to steady increases in operating costs that quietly drain your reserves.
Leadership teams use cash flow statements during monthly close to evaluate operational performance. Lenders and investors review them during loan applications and fundraising to assess risk and liquidity.
Auditors rely on them to verify that reported earnings translate into real cash. If you're sharing financial data with any external stakeholder, a clear and accurate statement of cash flows is essential.
Cash flow statement vs. income statement vs. balance sheet
A cash flow statement tracks actual cash movement. An income statement reports profitability on an accrual basis. A balance sheet shows your financial position at a point in time. Understanding the difference between cash flow vs. income statement vs. balance sheet helps you use each report for the right purpose.
A balance sheet shows what your company owns and owes on a specific date. An income statement focuses on revenue, expenses, and profit over a period. A cash flow statement isolates cash activity, excluding non-cash items like depreciation or accrued revenue.
Use the three statements together to understand where cash is going, how profitable the business is, and whether your resources are being used efficiently.
| Feature | Cash flow statement | Balance sheet | Income statement |
|---|---|---|---|
| Purpose | Shows cash coming into and out of your business | Shows company's financial position | Shows company's profits |
| Focus | Cash | Assets, liability, and equity | Revenue, expenses, and profits/losses |
| Measures | Liquidity and cash at hand | Net worth | Profitability |
| Time frame | A defined period (month, quarter, year, etc.) | Specific date (e.g., Jun 30, 2025) | A defined period (month, quarter, year, etc.) |
| Primary question answered | "Where did my cash come from, and where did it go?" | "What do we own, what do we owe, and what is our net worth?" | "Did we make money during this period?" |
Components of a cash flow statement
A cash flow statement groups cash activity into operating, investing, and financing categories. These sections show whether cash came from core operations, long-term investments, or funding sources like loans or equity.
Understanding each component helps you see how daily operations, strategic investments, and financing decisions affect your cash position.
Cash flow from operating activities
Operating activities capture the cash generated or used by your daily business operations. This includes cash received from customers and cash paid to suppliers, employees, and service providers. It may also include interest and tax payments depending on your accounting approach.
Examples of operating cash inflows include customer payments. Cash outflows include payments for inventory, salaries, rent, and utilities. This section matters because it shows whether your core business can sustain itself without relying on outside financing.
When you prepare operating cash flow using the indirect method, you'll encounter several common adjustments. Depreciation and amortization get added back to net income because they reduce profit on paper but don't use any cash. An increase in accounts receivable signals that you've earned revenue but haven't collected the cash yet.
An increase in accounts payable means you're holding onto cash longer by delaying payments to vendors, which temporarily boosts your cash flow from operating activities.
Cash flow from investing activities
Investing activities show how you use cash to acquire or sell long-term assets. Common cash outflows include spending on property, equipment, or other capital investments. Inflows often come from selling assets or investments.
These activities help you understand whether the business is reinvesting for future growth or divesting to generate cash. A negative investing number isn't necessarily bad; many growing companies consistently invest in equipment or infrastructure.
Cash flow from financing activities
Financing activities reflect how your company raises and repays capital. Inflows come from issuing stock or taking on new loans, while outflows include dividend payments, loan repayments, and share repurchases.
This section shows how you fund the business and helps stakeholders understand your approach to debt and equity. Strong financing cash flow can support expansion, while negative financing cash flow might indicate debt repayment or reduced use of external capital.
Cash flow statement example
Every cash flow statement follows the same three-section format: operating, investing, and financing. This statement of cash flows example uses the indirect method for Northwind Supply Co., a hypothetical wholesale distributor, for the year ended Dec 31, 2025:
| Line item | Amount |
|---|---|
| Operating activities | |
| Net income | $85,000 |
| Depreciation | $12,000 |
| Increase in accounts receivable | ($9,000) |
| Increase in inventory | ($6,000) |
| Increase in accounts payable | $5,000 |
| Net cash from operating activities | $87,000 |
| Investing activities | |
| Purchase of equipment | ($40,000) |
| Sale of used vehicle | $8,000 |
| Net cash used in investing activities | ($32,000) |
| Financing activities | |
| Proceeds from bank loan | $25,000 |
| Loan principal repayment | ($10,000) |
| Dividends paid | ($15,000) |
| Net cash from financing activities | $0 |
| Net increase in cash | $55,000 |
| Cash at beginning of year | $60,000 |
| Cash at end of year | $115,000 |
Northwind earned $85,000 in profit, generated $87,000 of operating cash, and ended the year with $55,000 more cash than it started with.
Download Ramp's cash flow statement template to build your own:
Get Ramp's Free Cash Flow Statement Template
How to read this cash flow statement example line by line
The operating section starts with profit and adjusts it, line by line, until it shows the cash Northwind actually collected and spent:
- Net income ($85,000): This is your starting point, pulled from the income statement.
- Depreciation ($12,000): Depreciation reduced profit but didn't use any cash, so you add it back.
- Increase in accounts receivable ($9,000): Customers owe Northwind $9,000 more than they did a year ago. That revenue is in net income, but the cash hasn't arrived, so you subtract it.
- Increase in inventory ($6,000): Northwind bought $6,000 more stock than it sold. That cash now sits on a shelf, so you subtract it.
- Increase in accounts payable ($5,000): Northwind owes vendors $5,000 more, so it kept that cash longer. That's why changes in accounts payable on a cash flow statement move in the same direction as cash.
Rule of thumb
An increase in a current asset means less cash. An increase in a current liability means more cash.
Amounts in parentheses are cash going out. Amounts without parentheses are cash coming in.
In investing, Northwind spent $40,000 on equipment and sold a used vehicle for $8,000, for a net outflow of $32,000. In financing, repayments of $10,000 and dividends of $15,000 exactly offset a new $25,000 bank loan, so net financing cash is $0.
Add the three subtotals and you get a $55,000 net increase in cash. That figure bridges Northwind's beginning and ending balances:
Ending cash = $60,000 + $55,000 = $115,000
Monthly cash flow statement example for a small business
A monthly cash flow statement catches cash timing problems before quarter-end, while you still have time to chase invoices or delay a purchase. That makes it a smart habit if you run a small business with tight margins.
This simple cash flow statement example covers March 2026 for a hypothetical two-person design studio:
| Line item | Amount |
|---|---|
| Net income | $6,000 |
| Depreciation | $500 |
| Increase in accounts receivable | ($2,500) |
| Increase in accounts payable | $800 |
| Net cash from operating activities | $4,800 |
| Laptop purchase | ($1,800) |
| Net cash used in investing | ($1,800) |
| Owner's draw | ($1,000) |
| Net cash used in financing | ($1,000) |
| Net increase in cash | $2,000 |
| Beginning cash | $12,000 |
| Ending cash | $14,000 |
The studio earned $6,000 in profit but generated only $4,800 in operating cash, because clients haven't paid $2,500 of invoices yet. Spotting that gap in March gives the owners time to follow up before it squeezes next month's bills.
Where to find real company cash flow statements
Public companies publish their statements of cash flows in annual 10-K and quarterly 10-Q filings. You can search these filings for free with the SEC's EDGAR full-text search or find them on a company's investor relations page.
When you open one, check these details first:
- Units note: Look at the top of the statement for "in thousands" or "in millions" before you read any figure.
- Net income reconciliation: If the company uses the indirect method, the operating section starts with net income and walks through adjustments like Northwind's.
- Supplemental disclosures: Look near the bottom for the cash the company actually paid for interest and income taxes.
How to calculate cash flow with the direct vs. indirect method
You can calculate cash flow using either the direct or indirect method. Both approaches are accepted under U.S. GAAP, and both should result in the same net cash flow from operating activities when applied correctly.
The direct method subtracts the cash you used for expenses from the cash you received from customers. It requires detailed records of cash receipts and payments, so it's more time-consuming for most companies. The indirect method starts with your net income and adjusts for non-cash items and changes in working capital, making it easier to prepare from existing financial statements.
Indirect method
The indirect method starts with net income from the income statement and adjusts it to convert accrual-basis profit into operating cash flow. This requires adjusting for non-cash expenses such as depreciation and amortization and for changes in working capital accounts like accounts receivable, inventory, and accounts payable.
These adjustments help isolate the actual cash generated by your core operations. The cash flow statement indirect method is widely used because it draws directly from your existing balance sheet and income statement.
Example of indirect method
Northwind's operating section shows the indirect method in action. The reconciliation takes five moves:
- Start with net income: $85,000
- Add back depreciation: + $12,000
- Subtract the increase in accounts receivable: – $9,000
- Subtract the increase in inventory: – $6,000
- Add the increase in accounts payable: + $5,000
Operating cash flow = $85,000 + $12,000 – $9,000 – $6,000 + $5,000 = $87,000
To get the total change in cash, add the three section subtotals. Net income is where operating cash flow starts, not a separate amount you add again.
Net change in cash = Operating cash flow + Investing cash flow + Financing cash flow
Net change in cash = $87,000 + (–$32,000) + $0 = $55,000
Direct method
The direct method lists all cash receipts and cash payments from operating activities. This includes cash received from customers and cash paid to suppliers and employees.
While the cash flow statement direct method provides more detail on cash transactions, it requires tracking each cash inflow and outflow individually. Many companies prefer the indirect method because it's faster to prepare with existing financial documents.
Example of direct method
Start with your cash inflows from customers and subtract cash used for expenses.
- Cash received from customers/sales: $200,000
- Cash paid to suppliers: –$80,000
- Cash paid to employees: –$50,000
- Cash paid for operating expenses: –$20,000
The calculation would look like this:
- Cash flow from operational activities = Cash received from customers – Cash paid for expenditures
- Cash flow from operational activities = $200,000 – $150,000 = $50,000
How to prepare a cash flow statement
Preparing a cash flow statement starts with gathering accurate financial records, selecting your calculation method, and organizing cash activity into operating, investing, and financing categories. The goal is to reconcile the change in cash over the period with your beginning and ending cash balances.
Clear categorization and up-to-date documents make the process faster and help reduce errors, especially if you're using automated tools to manage transactions and reconciliations.
1. Gather your financial documents
Collect the documents you'll need based on the method you plan to use. For the direct method, this typically includes bank statements, sales receipts, payroll records, and tax documents. For the indirect method, you'll also need your income statement, balance sheet, and working capital accounts.
Your statement is only as accurate as the income statement and balance sheet behind it. Ramp's Accounting Agent generates cards-side accruals at period-end (on NetSuite, Sage Intacct, QuickBooks Online, Microsoft Dynamics, and universal CSV). It also reconciles Ramp data against your ERP (QuickBooks Online and NetSuite), so those inputs stay current.
2. Determine the starting cash balance
Identify the cash balance at the start of the reporting period. You can find this figure on your balance sheet under cash and cash equivalents (plus any restricted cash). This number serves as the baseline for calculating changes in cash over the period.
3. Calculate cash flow from operating activities
Use either the direct or indirect method to calculate operating cash flow. This involves accounting for cash received from customers and cash paid for expenses such as salaries, rent, inventory, and utilities. If you're using the indirect method, adjust net income for non-cash expenses and changes in working capital.
4. Calculate cash flow from investing activities
Record cash activity involving long-term assets and investments. This includes cash used to purchase equipment or property and cash received from selling assets. Categorizing these transactions correctly helps distinguish between operational spending and long-term investment activity.
5. Calculate cash flow from financing activities
Summarize cash flows related to funding the business. Include inflows from issuing stock or taking on new loans and outflows for dividend payments, loan repayments, or repurchasing shares. This section shows how capital structure decisions impact your cash position.
6. Compute the ending cash balance
Add the net cash flows from operating, investing, and financing activities to your starting cash balance. The ending cash balance should match the total of cash, cash equivalents, and restricted cash on your period-end balance sheet. If it doesn't, revisit each category to ensure all transactions are recorded accurately.
How to interpret your cash flow statement
Interpreting a cash flow statement means looking beyond the totals to understand patterns in how you generate, invest, and return cash. A strong cash flow analysis focuses on each section individually before drawing conclusions about your overall financial health.
Positive operating cash flow signals that your core business generates enough cash to sustain daily operations. Negative operating cash flow suggests you may be relying on financing or asset sales to cover costs, which isn't sustainable long term. This is the most important section to watch because it reflects the cash your actual products or services produce.
On the investing side, consistent capital expenditures often signal growth investment, such as purchasing equipment or expanding facilities. Frequent asset sales without reinvestment may indicate financial distress. A growing company typically shows negative investing cash flow because it's putting money into assets that will generate future returns.
Financing cash flow tells you how the business funds itself. Raising capital through loans or equity can fuel expansion, but heavy reliance on debt without corresponding revenue growth creates risk, while steady dividend payments suggest management confidence in the company's cash position.
Use this quick checklist to sort what you see into strong signals and red flags:
| Strong signals | Red flags |
|---|---|
| Positive and growing operating cash flow | Operating cash flow consistently below net income |
| Capital expenditures funded from operating cash | Frequent asset sales to fund operations |
| Balanced financing activity | New debt covering operating shortfalls |
Northwind's statement checks the strong-signal boxes. Its operating cash of $87,000 exceeds its $85,000 net income, and operations funded the full $40,000 equipment purchase. Repayments and dividends offset the new bank loan, so financing stayed balanced.
Key cash flow metrics and ratios
The following cash flow metrics help you evaluate how efficiently your business generates and uses cash. These are analyst metrics, not GAAP-defined line items.
Free cash flow
Cash remaining after operating expenses and capital expenditures.
Free cash flow = Operating cash flow – Capital expenditures
Northwind's free cash flow, after its $40,000 equipment purchase, looks like this:
Free cash flow = $87,000 – $40,000 = $47,000
Operating cash flow ratio
Measures whether operating cash flow can cover short-term liabilities.
Operating cash flow ratio = Operating cash flow / Current liabilities
Current liabilities come from the balance sheet, not the cash flow statement. Assuming Northwind has current liabilities of $58,000:
Operating cash flow ratio = $87,000 / $58,000 = 1.5
Cash flow margin
Shows how effectively revenue converts to cash.
Cash flow margin = Operating cash flow / Net revenue
Net revenue comes from the income statement, not the cash flow statement. Assuming Northwind has net revenue of $600,000:
Cash flow margin = $87,000 / $600,000 = 14.5%
Limitations of a cash flow statement
A cash flow statement provides critical insight into liquidity, but it has boundaries you should understand before relying on it in isolation.
- Doesn't measure profitability on its own: You need the income statement for that. You can have strong cash flow but thin margins, or vice versa.
- Not easily comparable across industries: Different capital structures and operating models mean cash flow patterns vary widely, making cross-industry benchmarks unreliable.
- Backward-looking: It tells you where cash went during a defined period, not where it's going. Pair it with cash flow forecasting for forward visibility.
- Can be influenced by timing: You can delay payments or accelerate collections to temporarily improve your cash position at period-end.
Build accurate cash flow statements faster with Ramp
Your cash flow statement is only as good as the coding behind your income statement and balance sheet. When you code and reconcile transactions by hand, your close slows down and classification errors slip into every section.
Ramp's accounting automation software hands that first pass to the Accounting Agent. It auto-codes every transaction across GL, department, class, location, and custom fields the moment it posts, with no rules to build.
- Zero-touch lane for routine spend: Auto Mark Ready and Auto Sync move in-policy transactions straight to your ERP.
- Smarter with every correction: The agent learns from your corrections over time. Exceptions surface for your review, so you only touch what needs judgment.
- Full audit trail: Every AI decision shows its confidence level and rationale. You can override any of them.
You get 3.5x more transactions coded automatically vs. legacy/rules-only tools, so your team can spend its time on controls and analysis. Cleaner coding means your operating, investing, and financing lines start from accurate numbers.
Try an interactive demo to see how Ramp helps you close your books 3x faster.
FAQs
Cash includes cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that convert to cash quickly and aren't likely to change in value before maturity.
Cash flow is the movement of cash into and out of your business, reported on your statement of cash flows. Free cash flow is an analyst calculation of the cash left after operating expenses and capital expenditures, and it shows your financial flexibility.
Net income is based on accrual accounting and includes non-cash items. Operating cash flow adjusts net income to show the cash your core operations actually generated, giving you a clearer picture of liquidity.
Gather your financial documents, find your beginning cash balance, and calculate operating, investing, and financing cash flows using the direct or indirect method. Add the net cash flows to your starting balance, then verify the ending balance matches your balance sheet.
A ratio above 1 means your operating cash flow covers your current liabilities. The right level varies by industry, so compare your ratio with your own history and with similar businesses.
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