How to Create a Cash Flow Statement from Scratch
A cash flow statement shows you exactly where your money comes from and where it goes. Learn how to build one from scratch using either the direct or indirect method.
What Is a Cash Flow Statement?
A cash flow statement is one of the three essential financial statements every business needs (alongside the income statement and balance sheet). While the income statement shows profitability and the balance sheet shows net worth, the cash flow statement answers the most practical question: where did the cash go?
It tracks all cash inflows and outflows during a specific period, organized into three sections: operating activities, investing activities, and financing activities.
The Three Sections Explained
| Section | Includes | Examples |
|---|---|---|
| Operating Activities | Cash from core business | Customer payments, supplier payments, salaries, rent |
| Investing Activities | Cash for long-term assets | Equipment purchases, property sales, investment income |
| Financing Activities | Cash from debt and equity | Loan proceeds, loan repayments, owner draws, investor capital |
Method 1: The Direct Method
The direct method lists actual cash receipts and payments. It is simpler and more intuitive for small businesses.
Step-by-Step Process
- Step 1: List all cash received from customers during the period.
- Step 2: Subtract all cash paid to suppliers and vendors.
- Step 3: Subtract cash paid for salaries and wages.
- Step 4: Subtract cash paid for rent, utilities, and other operating costs.
- Step 5: Subtract taxes and interest paid.
- Step 6: The result is your net cash from operating activities.
Direct Method Example
| Line Item | Amount |
|---|---|
| Cash received from customers | $85,000 |
| Cash paid to suppliers | ($32,000) |
| Cash paid for salaries | ($28,000) |
| Cash paid for rent and utilities | ($6,500) |
| Cash paid for taxes | ($4,200) |
| Net Cash from Operations | $14,300 |
Method 2: The Indirect Method
The indirect method starts with net income and adjusts for non-cash items and changes in working capital. It is the method preferred by accountants and required for GAAP reporting.
Step-by-Step Process
- Step 1: Start with net income from your income statement.
- Step 2: Add back non-cash expenses (depreciation, amortization).
- Step 3: Adjust for changes in accounts receivable (increase = cash reduction).
- Step 4: Adjust for changes in accounts payable (increase = cash increase).
- Step 5: Adjust for changes in inventory (increase = cash reduction).
Completing the Statement
After calculating operating cash flow, add the investing and financing sections:
- Investing: Record any equipment purchases, property sales, or investment transactions.
- Financing: Record loan proceeds, repayments, owner investments, and distributions.
Sum all three sections and add your beginning cash balance. The result should match your ending bank balance. If it does not, review your entries for missing transactions.
Automate the Process
Creating a cash flow statement manually every month is tedious. Tools like the cash flow calculator can generate real-time cash flow analysis from your bank data. For a deeper understanding of financial statements, see our guide on how to read financial statements even if you are not an accountant.
Ready to put this into practice?
Finntree's AI CFO analyzes your finances using strategies from hundreds of top CFOs.
Start Your Free Trial