Cash is the oxygen your business needs to exist and grow. However, understanding the movement of your cash can often be tricky, especially when you’re a new business owner. This is where the statement of cash flows comes in as a valuable financial statement for your business.

Ready to find out more about what the statement of cash flow is and the benefits it can provide to your business? Keep on reading below!

The statement of cash flows

Essentially, the statement of cash flows shows how much cash your business has spent and earned within a specific time period, as well as its key drivers.

So, what does a typical statement of cash flows look like?

Let’s use the example of an ice cream retailer to help us visualize and understand the statement of cash flows.

Here’s an example of an ice cream retailer to help visualize and understand the statement of cash flows:

From what we can see, the business has had a positive net cash flow of $30,000 for the year ending  31 December 2020.

Why you should love the statement of cash flows

If you hadn’t guessed by now, the statement of cash flows provides useful insight into where your precious business cash has been used and sourced from.

If you’re burning through your cash faster than you anticipated, then reviewing your statement of cash flows will help you to identify where you have overspent so that you can change tactics in the future.

This statement accompanies the Statement of Profit and Loss and the Balance Sheet as one of the 3 key financial statements that, together, give you an excellent insight into your business’ financial position and profitability.

Now let’s walk through the key elements of the statement of cash flows so it’s clear where our cash has come from.

What the statement of cash flows comprises of

Let’s go back to our favourite ice cream business and look at the structure of their statement of cash flows. The statement of cash flows identifies separate cash flows coming from:

  • Operating activities. This is the cash coming from the main course of business. For example, selling ice cream, paying staff wages, and paying rent for the premises.
  • Investment activities. This is the cash coming from investing in new assets for the business, or investing excess cash in shares, for example.
  • Financing activities. This is the cash coming from the sources of finance, most likely in the form of a loan from the bank or an equity injection from shareholders. It can also include dividends paid to shareholders.
  • Net income. Simply put – this is their profit, and you will be able to agree on this figure of your profit in your statement of profit and loss.

4 steps to reading your statement of cash flows

We know that profit doesn’t always equal to cash – so we can view the statement of cash flows as being structured as a series of steps that gradually adjust our profit or loss to equal the cash inflow or outflow we’ve seen in that period.

This provides further insight into where your cash has come from and gone to.  Here are the 4 steps on how to understand this.

Step 1: Adjustments for non-cash items.

A prime example of a “non-cash item” is depreciation. This is when the value of an asset on the balance sheet is reduced over the years.
A depreciation charge is included in profit, but no actual cash changes hands in this process, so it needs to be added back.

A depreciation charge is included in profit, but no actual cash changes hands in this process, so it needs to be added back.

Step 2: Changes in Operating Assets & Liabilities.

In this step, we look at the balance sheet to identify if we have any outstanding receipts from customers or expected payments to suppliers.

This would mean that some revenues and expenses in our profit figure have not been settled in cash yet, so we would need to add them back.

An example of this is a supplier providing the ice cream store seven days to pay for a shipment of ice cream received. The expense has been incurred because they have the goods, but the cash hasn’t left the business yet.

This is the impact of accrual accounting.

Step 3: Sale and purchase of fixed assets

When we invest in fixed assets to support the running of our business, we do not record this as an expense in our profit and loss. Instead, it is recognized in the balance sheet as an asset, or an item we own.

This means that the cash impact of buying the asset hasn’t been captured in profit – and we would have to add it back in this step.

In this case, the ice cream store has decided to purchase a new ice cream van for $20,000 so that they can boost their sales by accessing more locations.

Step 4: Proceeds from long-term loans.

This refers to money from sources of finance. In this case, it would be from the bank that provided a loan of $20,000 so that the ice cream business could buy their van.

This loan sits in the balance sheet and not in the profit – so we would thus have to add it back to profit in this step.

Wrap up

In reality, there are a whole lot of steps that you might take to align your profit with cash – but for starters, those would be the main key ones.

And there you have it! That was a quick rundown of the essential components of the statement of cash flows and the key things to take note of. Hopefully, you now have a better understanding of why this financial statement is so useful, and why so many business owners love it!

Need additional help? Don’t hesitate to reach out to us at Sleek. Our friendly team is here to help you manage your business accounting and more.


You might be interested in reading about:

Are you ready for business incorporation?

Start a business in less than 3 hours with us. Talk to our experts today.

Subscribe to our newsletter

Our jam-packed newsletter covers monthly compliance updates, upcoming events and exclusive offers

Other articles that might interest you

Related content

Let’s talk shop!

Leave our friendly team a message and we’ll be in touch in no time.

Disclaimer: The information on this website is intended for general informational purposes only and may not be specifically relevant to everyone’s personal situation. It should not be considered financial advice or a substitute for professional tax or accounting advice. Each individual’s circumstances are unique, and laws can vary. For tailored advice, please consult a qualified professional. Contact Sleek for further information on how we can help you.

Simplify your business. Talk to one of our experts today.

Get $100 off on your first Sleek accounting purchase!

Offer applicable to new customers only, with the purchase of an accounting package. Valid until 31st October 2023.

30 Days Money Back Guarantee

Our refund policy:

We care about you – within 30 days from your purchase, if you’re unhappy with our services, we’ll refund our fee. Email or call us, and we’ll process the refund within five working days.

What it doesn’t cover:

We will not be able to refund Government fees once the application has been submitted, nor any third-party processing fees.

When it applies:

We cannot guarantee any specific legal outcomes when you use our services. For instance, a company registration might be filed correctly but still get rejected by the Company Registry for reasons beyond our control. We can only refund our fees for issues we are directly responsible for. In the case that you purchase a service and later change your mind, we can’t issue a refund.

Our customer support team is at your disposal for any questions or issue you may face.

Get started today

Chat with us on WhatsApp from your mobile


Need help?

Our sales team is available from Mon - Fri 9am to 6pm (Sydney Time)

Let's get in touch

Book a time with our experts to guide you in finding the best solution.