A cash flow statement shows the cash that moved in and out of a business over a period, such as a month, quarter or year. It splits that cash into three sections: operating activities, investing activities and financing activities.
CFI calls it one of the three key financial statements and describes it as a bridge between the income statement and the balance sheet. Those two are based on accrual accounting, so neither tells you directly what happened to your cash. The cash flow statement does. If you're not sure how the other two differ, this guide to the profit and loss account and the balance sheet sets them side by side.
The three sections of a cash flow statement
| Section | What goes in it | Examples |
|---|---|---|
| Operating | Cash from running the business day to day | Sales receipts, salary and rent payments, income tax |
| Investing | Buying and selling long-term assets | Property and equipment, intangible assets such as patents |
| Financing | Cash from or to investors and lenders | Business loans, interest on debt, issuing or buying back shares, dividends |
CFI defines operating activities as the principal revenue-producing activities: cash flows from sales, purchases and other expenses. Investing activities cover buying and disposing of long-term assets and other investments that don't count as cash equivalents. Financing activities come from changes in how the business is funded, which means borrowing and repaying loans, issuing and buying back shares, and paying dividends.
Why profit and cash aren't the same thing
This is the reason the statement exists. CFI says comparing operating cash flow with net income measures how well a company is running its operations, because the cash flow statement reflects the cash that really came in, not the profit on paper. Analysts often look at whether cash from operating activities consistently exceeds net income, which CFI calls a sign of high-quality earnings.
The gap comes from timing and non-cash items. If you sell on credit, the sale counts as revenue straight away, but no cash has arrived, so CFI explains that an increase in accounts receivable is subtracted from net income. Buying more inventory is a cash outflow too. Going the other way, depreciation reduces profit but no cash leaves the business, so it's added back.
Shopify adds a point that surprises people: positive cash flow doesn't necessarily mean the business is profitable. A company can have negative net income and still show positive cash flow because it borrowed.
Direct vs indirect method
There are two ways to present the operating section. Both are accepted under GAAP, the US standard, and IFRS, and whichever you choose, only the operating section changes. Investing and financing stay the same.
| Direct method | Indirect method | |
|---|---|---|
| How it works | Lists cash in from sales and cash out for expenses | Starts with net income and adjusts it back to cash |
| Accounting basis | Cash basis | Suits accrual accounting |
| Who uses it | Simple, but CFI says it's rarely used | Most businesses, because Shopify says it's easier to prepare |
If the cash basis and accrual basis distinction is new to you, read this explainer on cash vs accrual accounting first. The indirect method only makes sense once you see why accrual profit and cash drift apart.
How to prepare one with the indirect method
- Pick the period (a month, quarter or year) and note your starting cash balance.
- Start with net income from your income statement.
- Add back non-cash expenses such as depreciation and amortisation.
- Adjust for changes in working capital: receivables, inventory, prepaid expenses, payables and accrued expenses.
- Add the totals from investing and financing activities to get the net change in cash.
- Add that net change to your starting balance to confirm the closing cash balance.
Working capital is current assets minus current liabilities. CFI says changes in current assets other than cash, and current liabilities other than debt, are what move the cash balance in the operating section.
A worked example, line by line
Shopify publishes a hypothetical statement for one year. The figures below are its example, in US dollars, as of October 2026.
| Line | Amount |
|---|---|
| Net income | $120,000 |
| Add back depreciation and amortisation | $15,000 |
| Add back inventory write-downs and other non-cash items | $3,000 and $2,000 |
| Working capital changes (receivables down, inventory up, prepaid down, payables, accrued expenses and taxes payable up) | $5,000, ($8,000), $1,000, $7,000, $4,000, $2,000 |
| Net cash from operating activities | $151,000 |
| Net cash from investing (equipment and intangibles bought, equipment sold) | ($30,000) |
| Net cash from financing (shares issued, debt repaid, dividends paid) | $20,000 |
| Net increase in cash | $141,000 |
| Cash at the start of the year | $60,000 |
| Cash at the end of the year | $201,000 |
Look at the top and the bottom of the operating section. Net income was $120,000, but operating cash was $151,000, mostly because depreciation was added back and payables rose. That's CFI's comparison in action.
Three cash flow formulas worth knowing
- Operating cash flow = net income + depreciation - changes in working capital + non-cash items.
- Free cash flow = operating cash flow - capital expenditures. It shows what's left for owners, debt repayment or reinvestment after the business has paid for its equipment.
- Net cash flow = beginning cash balance + cash inflows - cash outflows. Shopify compares it to a checkbook: start with your balance, add deposits, subtract payments.
Shopify adds two rules of thumb. Small businesses generally aim for positive free cash flow of at least 10% of revenue, and the goal is a cash buffer that covers three to six months of operating expenses.
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How to read the result
Negative cash flow isn't automatically bad. Shopify notes it can come from investing in growth. But it says negative cash flow in more than one accounting period is a red flag. Shopify also suggests adding notes to the statement: definitions, how the numbers were calculated, which currency you're using and whether figures are in thousands. And if you'd like a head start, it says templates usually come as spreadsheets with the formulas already built in.
A cash flow statement looks backwards. Once you've read it, the next step is a cash flow forecast, which looks ahead.
My take
Profit tells you the model works. The cash flow statement tells you whether you can pay Friday's bills. I'd read it every month, and I'd always put operating cash next to net income. If cash keeps trailing profit, look at your receivables and stock first, because that's where cash usually gets stuck.
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Frequently asked questions
What are the three sections of a cash flow statement?
Operating activities, investing activities and financing activities.
What is the difference between the direct and indirect method?
The direct method lists cash received and paid. The indirect method starts with net income and adjusts it for non-cash items and working capital. Most businesses use the indirect method, and only the operating section differs.
Can a profitable business have negative cash flow?
Yes. Profit is recorded on an accrual basis, so sales on credit, stock purchases and loan repayments can drain cash even when the income statement shows a profit.
Why is depreciation added back on a cash flow statement?
Because it reduces net income without any cash leaving the business. CFI calls depreciation and amortisation non-cash expenses.
