Business owners need different financial statements to understand their company’s fiscal health. They need to track profit and loss, but they also need to track cash flow (especially the amount of cash the business generates), where that cash is coming from and how it is being used.

One of the three financial statements any business uses to understand fiscal performance is the statement of cash flows, also known as the cash flow statement. Along with the income statement and balance sheet, the cash flow statement provides a comprehensive picture of a company’s finances.  

Where the income statement shows profitability over time, the balance sheet describes the company’s financial position at any given point in time. The cash flow statement explains the actual movement of cash into and out of the business during that time. 

Reviewing all three financial statements gives business owners optimal visibility into the company’s financial performance. Comparing reports can help explain why the company’s bank balance differs from reported profit or where there may be liquidity problems. It can also support better decision-making for operations, financing and growth. 

Key Takeaways 

• Cash flow is not the same as profit: While a business can be profitable on paper, analyzing your cash flow statement reveals true liquidity and exposes critical timing differences between sales and actual payments. 
• The cash flow statement connects your financial reports: Serving as the missing link between your income statement and balance sheet, the cash flow statement tracks the exact movement of money in and out of your business over time. 
• Cash movement is separated into three areas: By categorizing cash flow into operating, investing and financing activities, the statement helps you instantly identify where your money comes from and how it is used. 
• It is essential for strategic decision-making: Regularly reviewing this statement allows you to anticipate cash shortages, evaluate financing needs and ensure you have the accessible liquidity required to fund daily operations and sustainable growth. 

Where Does Cash Flow Appear on Financial Statements? 

Cash flow appears on the cash flow statement. This statement reports the cash a business received and spent during a specific reporting period. 

Information about cash transactions also appears in other financial statements. For example, the balance sheet reports the company’s available cash on a specific date, but it does not explain how the cash balance changes. 

The income statement also reports revenue and expenses as they relate to profit, but it does not show cash inflow and outflow. For example, the income statement may record revenue from a sale before the customer pays, and some reported cash payments may be for purchases from an earlier reporting period. 

The cash flow statement connects these other financial reports by showing changes in cash inflow and outflow, and how the company moved from a beginning cash balance to an ending cash balance. 

Reviewing these three financial statements together provides an overall picture of a company’s financial health. 

The three primary financial statements provide different views of the business: 

What Is the Statement of Cash Flows?  

A statement of cash flows summarizes cash movement into and out of a business during a specific period. 

The report reconciles the cash you had at the beginning of the period with the cash you have at the end. This makes it easy to see if a business generated or spent more cash during the period. 

Where transactions are listed by date and account in a bank statement, a cash flow statement organizes cash movements according to business purpose. This makes it easier to identify where the cash comes from, such as part of normal business operations, the sale of an asset, new financing or some other source. 

What Does a Cash Flow Statement Show? 

A cash flow statement shows how cash moved through the business during a specific reporting period. 

The report identifies cash inflows, such as customer payments, loan proceeds or cash from selling equipment. It also identifies cash outflows, such as supplier payments, payroll, equipment purchases, debt repayments and owner distributions. 

The cash flow statement answers practical questions about the business, such as: 

• Did the company’s normal operations generate cash? 
• Did the business use cash to purchase equipment or other long-term assets? 
• Did the company borrow money or repay debt? 
• Why did the ending cash balance increase or decrease? 
• Does the business have enough liquidity to meet upcoming obligations? 

Details about cash flow can be especially valuable when a company reports a profit but still has difficulty paying its bills. 

Why Is the Statement of Cash Flows Important? 

The cash flow statement is important because it helps a company maintain liquidity, ensuring there is sufficient cash available to pay employees, suppliers, lenders, landlords and tax authorities. 

A business may be profitable on paper but still experience a cash shortage when customers are slow to pay, inventory purchases increase, debt payments rise or the company invests in growth. 

By reviewing the cash flow statement, business owners can identify where cash is being generated and where it is being consumed. Understanding sources of cash income and expenses can support more informed decisions about expenditures, financing, hiring, inventory, equipment and expansion. 

The Three Sections of a Cash Flow Statement 

To make it easier to understand cash inflows and outflows at a glance, the cash flow statement is divided into three categories: 

1. Operating activities 
2. Investing activities 
3. Financing activities 

By breaking down cash flow into these three categories, business owners can not only see whether available cash has increased or decreased, but why it has changed. 

What Are the Three Sections of a Cash Flow Statement? 

The three cash flow statement sections cover operating activities, investing activities and financing activities. 

Each section details a different aspect of how the company generates and uses cash. 

What Are Operating Activities? 

Operating activities are cash inflows and outflows associated with the company’s core business operations. 

The most common operating cash inflows are payments from customers. Common operating cash outflows include payments to suppliers, employees, landlords, insurance providers and tax authorities. 

Established businesses use operating cash flow to measure whether the company’s primary operations are generating sufficient cash to sustain the business. 

For example, a contractor may report revenue as project milestones are completed. However, the company may not receive payment until weeks later. The income statement may show profitable work while the operating section of the cash flow statement shows that normal operations generated little cash. 

What Are Investing Activities? 

Investing activities generally involve investments and the purchase or sale of long-term assets. 

Common investment examples may include: 

• Buying vehicles or equipment  
• Purchasing property 
• Selling equipment  
• Acquiring another business  
• Buying or selling certain investments 

Showing negative cash flow from investing activities is not necessarily a warning sign. A growing manufacturer, for example, might use cash to purchase equipment that expands production capacity that will yield higher profits later. 

When reviewing investment activities, business owners should consider why the cash was spent and whether the investment supports the company’s long-term goals. 

What Are Financing Activities? 

Financing activities show cash received from or paid to lenders, investors and business owners. 

Examples of financing activities may include: 

• Receiving proceeds from a business loan 
• Repaying loan principal 
• Receiving an owner contribution 
• Issuing equity  
• Paying dividends or owner distributions 

Assessing financing activities can help explain situations where cash balances increase even though operations did not generate positive cash flow. A new loan, for example, may temporarily improve the bank balance without improving business performance. 

Cash Flow Statement vs Income Statement vs Balance Sheet 

Each of these financial reports – the income statement, balance sheet and cash flow statement – is designed to answer different financial questions: 

• Income statement: Did the company earn a profit during the period? 
• Balance sheet: What does the company own and owe on a specific date? 
• Cash flow statement: How did cash enter and leave the business during a specific period? 

Each statement reveals an aspect of operations, but business owners need all three statements to gain a full understanding of their company’s financial position. 

What Is the Difference Between the Income Statement and Cash Flow Statement? 

The income statement measures revenue, expenses and profitability, while the cash flow statement measures actual cash inflows and outflows. 

Under accrual accounting, revenue is recorded when it is earned rather than when the cash is received, i.e., when the customer pays. Similarly, expenses may be recorded when they are incurred rather than when the business makes the payment. This timing difference is one reason reported profit does not always match the company’s change in liquidity. 

For example, consider a business that completes a $100,000 project for a customer in December but does not collect payment for the work until February. The income statement may show the revenue in December. However, the cash flow statement will not show the customer payment until the cash is received in February. 

While the income statement measures financial performance, the cash flow statement helps determine whether the business generates the cash needed to continue operating. 

How Is the Balance Sheet Different from the Cash Flow Statement?

The balance sheet shows a company’s assets, equity and liabilities at a specific point in time. The cash flow statement shows how available cash has changed over a period of time. 

Cash and cash equivalents appear as assets on the balance sheet. However, the balance sheet provides only the final cash amount as of the reporting date. It does not provide a complete explanation of the activities that increased or decreased that cash amount. The cash flow statement provides that explanation by reconciling the beginning and ending cash balances against inflows and outflows. 

For example, two companies might each have $100,000 in cash on their balance sheets. One may have generated the cash through profitable operations. The other may have received the cash through a new loan. Their ending balances are the same, but their financial circumstances are very different. The company showing a profit may still be short of cash if invoices have been recorded as profit but not paid. However, the company receiving the loan has an immediate cash infusion unrelated to profit.  

Which Financial Statement Shows Cash Flow?

While the balance sheet shows your cash balance and the income statement shows your profit, the statement of cash flows is the best tool to see the actual movement of money over time. It provides the missing link that the other two reports don’t cover.  

The cash flow statement reveals cash movement from operating, investing and financing activities during a specific period. The balance sheet reports the amount of cash held at a particular date, while the income statement reports profitability rather than cash movement. 

Why Business Owners Should Review Their Cash Flow Statement 

Reviewing cash flow statements regularly can help business owners determine whether the company has sufficient liquidity to operate effectively. A monthly review of cash flow may help identify: 

• Declining liquidity created by core operations 
• Slow customer payments 
• Increased inventory spending 
• Large equipment purchases 
• Rising debt repayments 
• Increased dependence on loans or owner contributions 
• Possible cash shortages in the future 

The cash flow statement can also help owners prepare for financing. Lenders will want to review financial statements to evaluate the company’s ability to generate cash, service debt and maintain sufficient liquidity. 

How Cash Flow Reviews Help Owners Plan Ahead 

Reviewing cash flow statements helps businesses understand how the company generates and uses cash. 

A regular review of cash flow can reveal whether normal operations produce enough liquidity to cover payroll, supplier invoices, rent, taxes and debt obligations. It can also help owners identify changes in cash inflows or outflows that may not be obvious from the income statement. 

For example, a retailer may report stronger sales but experience worsening cash flow because more money is tied up in inventory. Reviewing the operating and investing sections of a cash flow statement reveals where the cash is going. 

How Do Businesses Use Cash Flow Statements? 

Businesses use cash flow statements to monitor liquidity. The statement shows changes in cash balances to support budgeting, prepare forecasts and evaluate potential financing needs. 

A cash flow statement can guide strategic business decisions, such as whether to: 

• Hire additional employees 
• Purchase equipment 
• Increase inventory 
• Open another location 
• Apply for financing 
• Reduce expenses 
• Negotiate customer or supplier payment terms 

Reviewing historical cash flow statements can also improve forecasting by revealing patterns in collections, operating expenses, capital spending and financing activity. 

Why Is Cash Flow More Important Than Profit? 

Cash flow may not be more important than profit in the long run, but a business cannot fund ongoing operations with profits on paper. 

Profit measures whether revenue exceeded expenses during a reporting period. Cash flow measures whether the business received enough cash to cover its operating costs. 

A financially healthy business generally needs both sustainable profitability and adequate cash flow. Profitability supports long-term viability, while cash flow supports day-to-day operations. 

Profit tells you how the business performed. The cash flow statement shows whether the business generated the cash needed to keep operating. 

Common Misconceptions About Cash Flow Statements 

Many business owners confuse cash flow, profit and cash balances. Let’s clear up some common misconceptions about financial statements. 

Cash flow does not appear on income statements. The income statement is designed to report revenue, expenses and profit and loss for a specific reporting period. It does not provide a complete record of cash flowing into and out of the business. 

Some of the items listed on the income statement affect cash flow, but the timing is different. Cash transactions, such as equipment purchases or money from loans, affect cash flow but do not appear as revenue or expenses on the income statement. 

Cash flow is not the same as profit. Cash flow tracks money moving into and out of the business, while profit is the amount remaining after subtracting expenses from revenue.  

A company can show a profit without generating positive cash flow during the same period. A company can also show positive cash flow without earning a profit, such as when it receives an influx of cash investment or proceeds from a loan. 

A bank balance is not the same as cash flow. A bank balance shows how much money is available at a particular moment, whereas cash flow describes how money moves into and out of the business over time. 

Using the company’s bank balance to gauge cash flow can be misleading. The bank balance does not account for upcoming expenses, such as payroll, rent or taxes. The cash flow statement explains your company’s recent history of spending and collections. By showing you where your money went in the past, it helps you make better plans for the cash you have available now. 

Positive profit does not guarantee positive cash flow. If expenses must be paid before invoices are collected, then a profitable company can experience poor cash flow. Here is a list of some of the most common causes of poor cash flow that can impact profitable companies: 

• Slow-paying customers 
• Rapid inventory growth 
• Large equipment purchases 
• Seasonal revenue fluctuations 
• High debt repayments 
• Expansion expenses 
• Owner withdrawals 

Growing businesses tend to be more vulnerable to negative cash flow since they must spend cash on hiring, inventory, marketing or equipment before they generate revenue.  

Does the income statement show cash flow? 

The income statement does not show cash flow. The income statement reports revenue, expenses and profit, whereas the cash flow statement shows money moving into and out of the company. The key differences are timing and how the cash moves.  

Is cash flow the same as profit?  

Cash flow is not the same as profit. Cash flow shows how money enters the company and how it is used. Profit is the amount remaining after you subtract your business expenses from your total sales. Because you don’t always get paid the moment you make a sale, your profit and your cash on hand are rarely the same. 

Can a profitable business have poor cash flow?  

A profitable business can still have poor cash flow. Timing is the critical factor. Profits are reported as sales are made, but cash flow is based on when money enters or leaves the company. If a company closes a sale in one month but isn’t paid for 90 days, the company reports the sale even though it hasn’t received payment, which could create a cash shortfall. 

Using the Cash Flow Statement to Improve Financial Decisions 

The statement of cash flows is more valuable as a fiscal management tool when it is reviewed in tandem with the income statement, balance sheet, accounts receivable reports, budgets and cash flow forecasts. 

Begin by comparing the current cash flow statement with prior months or years. Any significant changes in operating, investing or financing cash flow may deserve closer attention. 

For example: 

• Declining operating cash flow may indicate slower collections or rising operating costs. 
• Large investing outflows may reflect equipment purchases or expansion. 
• Increasing financing inflows may indicate greater reliance on borrowing. 
• Strong profit combined with weak cash flow may point to growing receivables or inventory. 
• Strong operating cash flow may provide greater flexibility for debt repayment, investment or expansion. 

The cash flow statement explains what has already happened. A cash flow forecast builds on that information to plan for what to do next. 

When used together, historical cash flow statements and forward-looking cash flow forecasts can help business owners anticipate shortages, evaluate financing needs and make growth decisions with greater confidence. 

Frequently Asked Questions 

Which financial statement shows cash flow? 

The statement of cash flows, also called the cash flow statement, shows how cash entered and left a business during a reporting period. The cash flow statement is the only financial statement that shows true cash flow. 

What is the statement of cash flows? 

The statement of cash flows summarizes a company’s cash inflows and outflows. It tracks how the business moved from its beginning cash balance to its ending cash balance for a prescribed period. 

What are the three sections of the cash flow statement? 

The cash flow statement is broken into three sections: operating activities, investing activities and financing activities. Taken together, these categories show whether cash came from core operations, investments in assets or transactions with lenders and owners. 

Is cash flow reported on the balance sheet? 

The balance sheet reports cash and cash equivalents on a specific date, but it does not report the company’s cash flow. The statement of cash flows explains how the cash balance changed during the reporting period, including cash entering and leaving the business. 

Is cash flow reported on the income statement? 

Cash flow is not reported on the income statement. The income statement reports revenue, expenses and profit or loss. The statement of cash flows reports actual cash inflows and outflows. 

Why is the cash flow statement important? 

The cash flow statement helps business owners monitor liquidity, understand changes in cash balances, identify possible shortages, evaluate financing needs and make more informed operating and growth decisions.