In business, there’s no denying that cash is king. That’s why cash flow statements are so important since they speak volumes about an organisation’s health. Cash flow statements show how much cash a company has as well as how much it needs to pay debts and fund operating costs over time.
What Is a Cash Flow Statement? How It Works and Examples
A cash flow statement, otherwise known as a statement of cash flows, tracks the cash or cash equivalents a company generates and spends over a specific period. It is designed to provide insights into a company’s financial health and track historical changes and operational efficiency.
Cash flow statements make it easy to analyse operational performance because they track any changes in assets, liability, and equity. They are split into three sections to make it easier to digest:
- Cash from operating activities: For example, money earned from selling products or services.
- Investing activities: Investing activities include asset purchases and sales.
- Financing activities: Financing activities might include cash spent on repaying debt.
There are two ways of calculating cash flow: the direct method and the indirect method. The direct method, which tracks changes in cash receipts and payments, is typically used by smaller companies and start-ups. The indirect method is used by most companies—including larger organisations—and involves taking the net income generated over a certain period and adding or subtracting changes in assets and liabilities to work out the implied cash flow.
| Direct cash flow method | Indirect cash flow method |
|---|---|
| Tracks changes in cash receipts and payments | Calculated by taking the net income over a certain period and adding or subtracting changes in assets and liabilities |
| Typically used by smaller companies and start-ups | Used by most companies, especially larger organisations |
A cash flow statement bridges the gap between an income statement and a balance sheet.
The balance sheet presents a company’s assets from one period to the next and the income statement covers expenses and income over time. Both the balance sheet and income statement can be used when preparing the cash flow statement.
Companies in Australia typically use the Australian Accounting Standards(opens in a new tab), designed to align with the International Financial Reporting Standards (IFRS), to prepare cash flow statements, and are required to lodge financial reports with the Australian Securities and Investments Commission (ASIC).
Every year, a company will have to either fill in estimated or actual figures against different categories (opening balance, cash incoming, cash outgoing, and more). Labels and justifications will have to be used when estimating costs and your statement will have to state whether the figures include or exclude goods and service tax (GST).
Importance of a Cash Flow Statement
Cash flow statements are crucial because they bridge the gap between the income statement and the balance sheet. They can help management teams make decisions about where to invest excess cash or identify areas where to cut costs. This can cause investor relationships to grow and will help to identify areas of high cash usage.
The cash flow statement shows:
- The company’s current financial structure (liquidity and solvency).
- The ability to generate cash.
- Comparison between present and future cash flows of different entities.
- Indication of the amount, timing and certainty of future cash flows.
- The relationship between profitability and net cash flow.
- Helps to make reporting systematic across bookkeeping, as it eliminates the effects of using different accounting treatments for the same transactions and events.
The importance and benefits of a cash flow statement go hand-in-hand. The cash flow statement is particularly crucial when analysing the financial state of a company, as it can help to pinpoint trends and changes over time.
Main Components of a Cash Flow Statement
A cash flow statement comprises three components. These are:
1. Operating activities
Cash flow from operating activities captures the cash that is generated from a company’s products or services before tax. Typically, these will include:
- Transactions from all operational business activities,
- Paying employee salaries,
- Income tax,
- Rent payments,
- Interest payments and more.
Depreciation usually appears in this section of the cash flow statement as a non-cash expense ‘add back,’ because it’s not an outflow of cash. This not only appears on the cash flow statement but on the balance sheet and income statement as well. On the income statement, this is also recognised as an operating cost, reducing the taxable income.
Inventory value is also included in the operating activities section of the cash flow statement, as are other operating expenses. When the cash spent on inventory increases, it indicates a company has spent more on raw materials or products to resell. The change in inventory value directly impacts the calculated operating cash flow—a higher inventory level indicates there is less cash on hand because the money is in unsold goods.
Any changes in accounts receivable on the balance sheet must be reflected in the cash flow statement. An increase suggests a company has more money it expects to receive from customers but hasn’t yet collected. This reduces the amount of cash available, so it’s subtracted from the net income on the statement. When this decreases, it can indicate the company has collected more cash from customers more quickly.
2. Investing activities
The investing activities component of a cash flow statement refers to any sources and uses of cash from the company’s investments. This will reflect any gains and losses made as a result of investments. These might include:
- Equipment purchases
- Loans
- Purchase of fixed assets
- Purchase of investments and more
3. Financing activities
The third component is financing activities. This refers to the sources of cash from investors and banks as well as the way cash is paid to shareholders. These might include:
- Dividends
- Payments for stock repurchases
- Repayment of debt and more
Methods of preparing cash flow statements
The first thing to do when preparing a cash flow statement is to determine the starting balance of cash (or cash equivalent) which can be found on the income statement. Next, calculate the cash flow from operating activities. There are two methods to do this: the indirect and direct method. The main difference between the two is what each method starts with. The direct method begins with actual cash receipts and payments, while the indirect method starts with net income and then makes adjustments to convert it to cash flow. Here are the key differences:
Direct Cash Flow
This method relies on a cash-basis account and involves listing all cash receipts and payments during the reporting period. The steps in this process may include:
- List cash receipts.
- List cash payments, such as cash paid to suppliers, and employees, interest paid, and income taxes paid.
- From here, calculate the net cash flow from the operating activities—do this by subtracting total cash payments from total cash receipts.
A business might choose this method if it needs a specific breakdown of incoming and outgoing cash. This method is helpful for specific analysis. Some industries may also require businesses to use a direct method for reporting.
Indirect Cash Flow
This method is based on accrual-basis accounting, which means revenue and expenses are counted when they are incurred rather than when the money changes hands. This is what the steps in that process will likely look like:
- Get the net income from the company’s income statement,
- Adjust for non-cash items,
- Adjust for any changes in working capital,
- Calculate the net cash flow from operating activities,
- Combine the adjusted net income with changes in working capital.
Most Australian businesses calculate their cash flow using the indirect method because it is easier to prepare and will generally align with the information from the income statement and balance sheet.
Once cash flows from operating activities have been calculated, including operating costs, you can calculate the cash flows from investing and financing activities. When this has been completed for the three types of business activities—operating, investing and financing—the final balance of cash and cash equivalent can be determined.
Any change in the net cash amount can be attributed to the sum of cash flows from operating, investing, and financing activities. This shows the amount of cash a company has gained and lost during the reporting period. A positive net cash flow usually indicates a company has had more cash flowing into it than out of it. Negative net cash typically shows that more was spent than was earned in a given period.
Cash flow statement example
Below is an example of a cash flow statement for ANZ Bank
ANZ Group Holdings Limited
Half Year, 31 March 2024
Condensed Consolidated
Cash
Flow Statement
| Half Year | |||
|---|---|---|---|
| Mar 24 $M |
Sep 23 $M |
Mar 23 $M |
|
| Profit after income tax | 3,421 | 3.565 | 3,569 |
| Adjustments to reconcile to net cash flow from operating activities: | |||
| Allowance for expected credit losses | 70 | 112 | 133 |
| Depreciation and amortisation | 445 | 452 | 471 |
| Loss on reclassification of data centres to held for sale | - | - | 43 |
| Net derivatives/foreign exchange adjustment | 850 | (1,912) | 5,417 |
| (Gain)loss on sale from divestments | 21 | (29) | - |
| Other non-cash movement1 | (10) | (71) | (3) |
| Net (increase/decrease) in operading assets: | |||
| Collateral paid | 262 | 958 | 3,185 |
| Trading assets2 | (20) | 384 | (6,272) |
| Net loans and advances1 | (10,665) | (16,300) | (11,339) |
| Other assets1 | (587) | (480) | (1,226) |
| Net (increase/decrease) in operating liabilities: | |||
| Deposits and other borrowings | (4,492) | (19,790) | 41,391 |
| Settlement balances owed by ANZ | (4,178) | (3,775) | 9,053 |
| Collateral received | (2,897) | 2,044 | (7,892) |
| Other liabilities2 | 2,175 | 1,873 | 2,927 |
| Total adjustments | (19,018) | (36,534) | 35,888 |
| Net cash (used in)/provided by operating activities1 | (15,597) | (32,969) | 39,457 |
| Cash flows from investing activities | |||
| Investment securities assets: | |||
| Purchases | (43,900) | (38,477) | (13,553) |
| Proceeds from sale or maturity | 22,996 | 35,969 | 5,432 |
| Proceeds from divestments, net of cash disposed | 668 | 558 | - |
| Net movement in shares in controlled entities | - | - | (10) |
| Net investments in other assets | (451) | (255) | (350) |
| Net cash (used in)/provided by investing activities | (20,687) | (2,205) | (8,481) |
| Cash flows from financing activities | |||
| Deposits and other borrowings (repaid)/drawn down | (27) | (12,042) | 937 |
| Debit issuances4 | |||
| Issue proceeds | 26,240 | 19,141 | 25,041 |
| Redemptions | (16,639) | (9,296) | (14,689) |
| Dividends paid5 | (2,754) | (2,401) | (1,979) |
| On market purchase of treasury shares | (126) | (2) | (19) |
| Repayment of lease liabilities | (142) | (150) | (156) |
| ANZ Bank New Zealand Perpetual Preference Shares | 252 | - | - |
| Net cash (used in)/provided by financing activities | 6,774 | (4,750) | 9.135 |
| Net increase/(decrease) in cash and cash equivalents | (29,510) | (39,924) | 40,111 |
| Cash and cash equivalents at beginning of period | 168,154 | 208,800 | 168,132 |
| Effects of exchange rate changes on cash and cash equivalents | (945) | (722) | 557 |
| Cash and cash equivalents at end of period | 137,699 | 168,154 | 208,800 |
Using Cash Flow Statement for Financial Analysis
Cash flow statements are very helpful when it comes to financial analysis, especially when comparing figures across multiple periods (quarterly, half-yearly, and annually). This can be useful in identifying patterns and any potential issues like declining cash flow or unnecessary spending.
Some trend examples along with their cause include:
- Fluctuations in operating cash flow—this could indicate issues with inventory or accounts receivable collection.
- Negative cash flow in investing activities—could suggest large investments in new projects.
- Positive cash flow in financing activities could be due to issuing new debt.
Analysis of a cash flow statement can also be extremely helpful in understanding trends, especially when comparing performance to industry benchmarks and competitors. Negative cash flow can indicate the company is spending more than it is receiving. However, this isn’t always a bad thing, if managed correctly and over a short period. Start-ups investing in growth would expect to see a negative cash flow, for example.
The key to managing negative cash flow correctly is to monitor it closely. The potential issues that may arise stem from liquidity issues and could include (but are not limited to) an inability to pay bills or difficulty covering expenses.
Manage Cash Flow Seamlessly with the NetSuite Cash Management Solution
Knowing how much cash is coming in and how much is going out is fundamental to running a business, and cash flow statements are the financial reports that give business leaders the information they need to know to determine the health of their organisations. Streamline your cash flow statement processes and gain real-time insight with NetSuite’s cash management solution, part of NetSuite ERP. With report automation and real-time financial data, you can easily gain an accurate picture of your current cash position.
Cash Flow Statement FAQs
What is the meaning of cash flow statement?
A cash flow statement is a financial statement that reports the cash and cash equivalents a business may have earned or spent over a particular period. Sometimes known as a statement of cash flows, these reports help to reveal an organisation’s liquidity and financial health over time.
What is an example of a cash flow?
Examples of operating cash flow include income earned from things like the sale of goods and services. Outgoing payments such as salary and rent are also examples of operating cash flow. Cash flow from investing activities, on the other hand, may include the acquisition or disposal of long-term assets or other investments. Meanwhile, financing cash flow includes dividend payments or the payment of interest to service debts.
What is the difference between a balance sheet and a cash flow statement?
The main difference between a balance sheet and a cash flow statement is that a balance sheet shows the company’s assets and liabilities at a specific time, whereas a cash flow statement shows the movement of cash over a longer period. It may be best to think of a balance sheet as being static whereas the cash flow statement is more dynamic, helping companies to make long-term decisions.
What is the purpose of a cash flow statement?
The core purpose of a cash flow statement is the tracking of inflows and outflows of cash to and from the business.
How do you analyse a cash flow?
Cash flow statements can be analysed to gauge the operating performance of a business, along with other metrics. For example, free cash flow—a key profitability measure—can be calculated by subtracting capital expenditures from operating cash flow. This provides business owners and potential investors with some insight into the organisation's profitability over time.
