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Understanding a cash flow statement for small businesses

In the relentless pursuit of business success, a steady cash flow is a vital lifeblood, fueling growth and ensuring survival. Cash flow management, often overlooked yet undeniably crucial, is the key to unlocking a business's true potential. For many small businesses, the lack of effective cash flow management proves fatal, as highlighted by a prominent study from CBInsights.

This article delves into the fundamentals of cash flow management, empowering you to transform this essential financial metric into the driving force behind your business's success. Whether you're a seasoned entrepreneur or a curious newcomer, you'll discover how to harness the power of cash flow management to safeguard your business's existence and unlock limitless possibilities for sustainable growth.

Understanding cash flow in your business

Cash flow refers to the net balance of cash moving into and out of business at a specific time, whether positive or negative. Unlike revenue, which only measures how much money is coming in. If your cash flow is positive, then that means that your business is making money. Still, if negative, your business has more outflows than incomes, losing money.

Calculating net cash flow

The most basic formula for calculating net cash flow is:

Net Cash Flow = Cash Inflows - Cash Outflows

Cash Inflows

Cash inflows represent all the sources of revenue your business receives during a specific period. These include:

  • Sales revenue is the income generated from selling your products or services to customers.

  • Investments: If your business receives investments from external sources, these count as cash inflows.

  • Other income may include interest earned on investments, rental income, or other miscellaneous income.

Cash Outflows

Cash outflows represent all the expenses your business incurs during a specific period. These include:

  • Cost of goods sold (COGS): The cost of producing the goods or services you sell.

  • Operating expenses: These are the ongoing expenses required to run your business, such as rent, utilities, salaries, and marketing costs.

  • Capital expenditures: These are expenses related to purchasing long-term assets, such as equipment, machinery, or real estate.

Interpreting net cash flow

A positive net cash flow indicates that your business generates more cash than it is spending. This is a healthy sign that your business is financially stable and has growth potential.

A negative net cash flow indicates that your business is spending more cash than it generates. This could be due to factors such as slow sales, high operating expenses, or excessive capital expenditures. A prolonged negative cash flow can put your business at risk of financial distress.

There are several formulas to calculate a business cash flow. We encourage you to check some cash flow examples.

Cash flow statement example

Cash Flow Statement of Sunny's Cafe

For the Quarter Ending June 30, 2023

1. Cash Flows from Operating Activities:

  • Net Income: $15,000

  • Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

    • Depreciation: $500

    • Increase in Accounts Receivable: $(-) 1,000

    • Decrease in Inventory: $2,000

    • Increase in Accounts Payable: $1,500

    • Decrease in Accrued Expenses: $(-) 700

    • Increase in Prepaid Expenses: $(-) 300

  • Total Adjustments: $2,000

Net Cash Provided by Operating Activities: $17,000

2. Cash Flows from Investing Activities:

  • Purchase of New Coffee Machine: $(-) 4,500

  • Proceeds from Sale of Old Furniture: $800

Net Cash Used in Investing Activities: $(-) 3,700

3. Cash Flows from Financing Activities:

  • Proceeds from New Bank Loan: $5,000

  • Repayments of Loan: $(-) 2,000

Net Cash Provided by Financing Activities: $3,000

$17,000 (Operating) - $3,700 (Investing) + $3,000 (Financing) = $16,300 (Net Increase in Cash and Cash Equivalents).

Cash and Cash Equivalents at the Beginning of the Period: $8,000

$8,000 (Beginning Balance) + $16,300 (Net Increase) = $24,300 (Cash and Cash Equivalents at the End of Period).


  • The Net Income is taken from the income statement.

  • Depreciation is a non-cash expense added back to the net Income.

  • Changes in Accounts ReceivableInventoryAccounts PayableAccrued Expenses, and Prepaid Expenses reflect the changes in working capital.

  • Investing Activities include cash spent on acquiring new assets and proceeds from selling old assets.

  • Financing Activities represent cash flows from borrowing and repayment of debts.

This statement shows that Sunny's Cafe had a positive cash flow for the quarter, with an overall cash and cash equivalents increase.

How often do you prepare a cash flow statement?

Consider tracking it month-by-month for the first two years or so. Eventually, you may want to move on to keeping track of every quarter. Use your cash flow statement during times of growth or slow cycles to catch any evolving issues before they become problems. These issues could be: Waiting for customer payments before you can pay your bills, consistently paying your bills late, and when your accessible funds do not seem to align with your business' profit and loss statement.

After you categorize your cash flow statement, you'll be able to know your businesses:

  • Accounts receivable: What are you owed, and when can you realistically expect to receive it?

  • Accounts payable: What do you owe, and can you meet your obligations?

Shortfalls: Do you owe more than you can pay?

You can track your cash flow on a basic spreadsheet or use a small business accounting program. We recommend hiring an accountant to run a comprehensive cash flow statement annually or quarterly. Ask a trusted financial expert about the best way to keep a detailed record of your cash flow.

Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.

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