Cash flow statement example: a small business year, both methods

Short answer: a cash flow statement shows, for one period, the cash a business had at the start, the cash that came in and went out in three groups (operating activities: day-to-day trading; investing activities: buying or selling equipment and other long-term assets; financing activities: loans, owner money and dividends), and the cash it had at the end. Below is a complete year for a small contracting company, worked out both ways it can be written: the indirect method, which starts from net profit and adjusts it using the balance sheet, and the direct method, which lists cash received and paid. Both arrive at the same operating cash figure. After that comes a first-year startup example, a layout you can copy and what to look for when you read one. The figures are made up, but every sum adds up.

Example 1: an electrical contractor, one year

A small electrical contracting company in Australia, for the financial year 1 July to 30 June. To keep the sums easy to follow, every figure excludes GST.

The two inputs are the year’s Profit and Loss and what changed on the Balance Sheet between the start and the end of the year.

Profit and Loss for the year	$
Sales	600,000
Cost of sales (materials 150,000, subcontractors 120,000)	−270,000
Gross profit	330,000
Wages and super	−180,000
Rent	−24,000
Vehicle running costs	−18,000
Insurance	−8,000
Other overheads	−20,000
Depreciation	−15,000
Interest on the vehicle loan	−5,000
Net profit before tax	60,000

Balance Sheet line	1 July	30 June	Change
Cash at bank	40,000	41,000	+1,000
Trade debtors (customers owe)	50,000	80,000	+30,000
Stock of materials	20,000	25,000	+5,000
Trade creditors (owed to suppliers)	30,000	36,000	+6,000

During the year the company also bought a new van for $45,000 with a $30,000 loan, sold its old ute for $8,000 (its value in the books, so no gain or loss on the P&L), repaid $6,000 of loan principal, paid last year’s income tax of $12,000 and paid the owners a $20,000 dividend.

The indirect method

Cash flow statement for the year	$
Operating activities
Net profit before tax	60,000
Add back depreciation (a cost, but no cash left)	15,000
Increase in trade debtors	−30,000
Increase in stock	−5,000
Increase in trade creditors	6,000
Cash generated from operations	46,000
Income tax paid	−12,000
Net cash from operating activities	34,000
Investing activities
Purchase of a van	−45,000
Sale of the old ute	8,000
Net cash from investing activities	−37,000
Financing activities
Vehicle loan received	30,000
Loan principal repaid	−6,000
Dividend paid	−20,000
Net cash from financing activities	4,000
Net change in cash	1,000
Cash at the start of the year	40,000
Cash at the end of the year	41,000

The closing $41,000 matches the bank on the Balance Sheet, which is the check that the statement is complete.

Why each adjustment has the sign it has:

• Depreciation is added back because it lowered profit without any money leaving the bank this year. The cash went out when the van was bought, and that is under investing.
• More money owed by customers is a minus. Sales of $600,000 were counted in profit, but debtors rose by $30,000, so only $570,000 of it arrived as cash.
• More stock is a minus. $5,000 of materials were paid for and are sitting on shelves, not yet in cost of sales.
• More owed to suppliers is a plus. $6,000 of costs counted in profit have not been paid yet, so the cash is still in the bank.

The direct method, same year

The direct method lists the cash itself. It is the layout of Xero’s own Statement of Cash Flows report.

Operating activities	$
Receipts from customers (600,000 sales − 30,000 more owed)	570,000
Payments to suppliers and employees	−519,000
Interest paid	−5,000
Income tax paid	−12,000
Net cash from operating activities	34,000

Payments to suppliers and employees are the P&L’s cash costs (270,000 cost of sales + 250,000 overheads, leaving out depreciation and interest = 520,000), plus the $5,000 extra stock bought, less the $6,000 not yet paid to suppliers: 520,000 + 5,000 − 6,000 = 519,000. Investing and financing are the same in both methods; only the operating section is written differently.

What it tells the owner

1. Cash barely moved, but a lot happened. The bank went from $40,000 to $41,000, which on its own suggests a quiet year. The statement shows $34,000 generated by trading, $37,000 spent on vehicles and a net $4,000 from lenders and owners.
2. Profit of $60,000 became $34,000 of operating cash. The biggest gap is the $30,000 more that customers owe. At year end debtors are 80,000 ÷ 600,000 × 365 = 49 days of sales, up from about 30 days at the start. Getting back to 30 days would release about $30,000. The debtor days calculator does this sum with your own figures.
3. The van was mostly borrowed. $45,000 out, $8,000 back for the ute, $30,000 from the loan, so the business funded $7,000 of it from its own cash.
4. The dividend was covered, just. Operating cash of $34,000 paid for the $20,000 dividend and the $6,000 repayments, with $8,000 to spare, which then went into the van. If the dividend had been $35,000 the bank would have fallen by $14,000 in a profitable year.

Example 2: a startup’s first year

An online homewares shop set up as a UK limited company, in its first year. Figures exclude VAT.

Cash flow statement, first year	£
Operating activities
Net loss	−18,000
Add back depreciation	2,000
Increase in stock	−25,000
Increase in debtors (marketplace payouts not yet received)	−1,000
Increase in trade creditors	9,000
Net cash from operating activities	−33,000
Investing activities
Equipment	−10,000
Net cash from investing activities	−10,000
Financing activities
Shares issued to the founder	20,000
Director’s loan	15,000
Bank loan	20,000
Net cash from financing activities	55,000
Net change in cash	12,000
Cash at the start	0
Cash at the end of the year	12,000

The loss was £18,000, but trading used £33,000 of cash, because £25,000 went into stock. All of it was paid for by the founder and the bank. That is normal in a first year; the question is how long it can continue. Operating cash out averaged 33,000 ÷ 12 = £2,750 a month, so £12,000 lasts about four months at that rate. The free cash burn rate and runway calculator does this for your own figures and shows what changes if the burn falls. For a quick version of the whole statement from your own money in and out, the net cash flow calculator gives the operating, investing and financing totals and says which one moved the bank. For a plain list of what counts as money in and money out, with a month for a plumbing business sorted into the three groups, see cash inflow and outflow examples. To see how much of the profit became cash the owners could take out, the free cash flow calculator takes operating cash flow less equipment spending.

A layout you can copy

Cash flow statement for [business name]
For the period [start date] to [end date]

Operating activities
  Net profit (or loss) before tax
  Add back: depreciation and amortisation
  (Increase) / decrease in debtors
  (Increase) / decrease in stock
  Increase / (decrease) in creditors and accruals
  Cash generated from operations
  Income tax paid
  Net cash from operating activities          A

Investing activities
  Purchase of equipment, vehicles, property
  Proceeds from selling assets
  Net cash from investing activities          B

Financing activities
  Loans received / (repaid)
  Capital put in by owners
  Drawings or dividends paid
  Net cash from financing activities          C

Net change in cash                            A + B + C
Cash at the start of the period               D
Cash at the end of the period                 D + A + B + C   (must match the bank)

Brackets mean a minus. A rise in something the business owns (debtors, stock) uses cash; a rise in something it owes (creditors, accruals, tax payable) keeps cash in the bank for now.

How to read any cash flow statement

• Is operating cash positive? A business whose trading brings in more cash than it spends can pay for equipment, loans and owners from its own money. One negative period can be timing; several in a row means something else is paying for the business.
• How does operating cash compare with profit? Well below profit usually means customers paying more slowly or stock building up. Cash flow from operations compares three businesses with the same profit and very different operating cash. Profit in Xero but no cash in the bank lists the usual causes and how to find yours.
• Does operating cash cover repayments and drawings or dividends? If not, the difference comes out of the bank balance. How much can I pay myself? works out an amount the business can sustain.
• Is the closing balance enough? How many months of cash should a business have? gives a target to compare it with.

To turn these questions into a full review of your own figures, with amounts against each cause, follow the six checks in cash flow analysis for a small business.

Getting a real one from Xero

Xero has a Statement of Cash Flows report under Accounting > Reports. It uses the direct method, like the second table in Example 1, built from the transactions in your bank accounts. Menu names move between Xero releases, so if a label does not match your screen, search Xero Central for the report name. Xero Statement of Cash Flows: how to run and read it covers the settings and the checks to make before trusting it (unreconciled lines, accounts missing from Xero, transfers coded as income or costs).

To build the indirect version yourself, run the Profit and Loss for the period and the Balance Sheet at the start and end dates, then follow the layout above. Profit and loss vs balance sheet shows where each kind of transaction lands, and the free profit but no cash explainer does the reconciliation in your browser from figures you type in. A cash flow statement looks back; for the months ahead, see this cash flow forecast example, and for the weeks ahead, the 13-week cash flow forecast.

Common questions

What are the three sections of a cash flow statement? Operating activities (cash from day-to-day trading, including tax paid), investing activities (buying and selling long-term assets such as equipment and vehicles) and financing activities (loans received and repaid, money the owners put in, and drawings or dividends paid). Together they explain the change in cash between the start and the end of the period.

What is the difference between the direct and indirect method? Only the operating section differs. The direct method lists cash received from customers and paid to suppliers, staff, lenders and the tax office. The indirect method starts from net profit, adds back costs that used no cash such as depreciation, and adjusts for changes in debtors, stock and creditors. Both give the same operating cash figure.

Why is depreciation added back in a cash flow statement? Depreciation lowers profit but no money leaves the bank for it. The cash went out when the asset was bought, and that payment appears under investing activities in the year of purchase.

Why does an increase in debtors reduce cash flow? Sales count in profit when they are invoiced. If customers owe more at the end of the period than at the start, part of those sales has not arrived as cash yet, so the increase is taken off profit to get to operating cash.

Is a cash flow statement the same as a cash flow forecast? No. A cash flow statement records what already happened in a past period. A cash flow forecast estimates future cash in and out, usually week by week or month by month, to spot a shortfall before it happens.

Where does interest go on a cash flow statement? Small businesses usually show interest paid under operating activities, as in the examples here. Accounting standards also allow it under financing activities, as long as the same choice is used every year. For companies reporting under IFRS, that choice ends for years beginning on or after 1 January 2027, when interest paid moves to financing; the IAS 7 statement of cash flows guide shows the effect.

Your cash, explained every Monday

ReportPilot reads your Xero figures and sends a short plain-English email every Monday: the cash in the bank against the end of last month, roughly how many months it lasts if it has been falling, money owed to you that is past due and by whom, and bills due in the next two weeks against your cash. It asks Xero for read-only access, and there is a 14-day free trial with no card.