Xero Statement of Cash Flows: how to run it and what it tells you

The Statement of Cash Flows in Xero answers one question: where did the cash come from, and where did it go? It starts with the cash you had at the beginning of the period, lists everything that went in and out of your bank accounts in three groups (day-to-day trading, buying or selling assets, and loans and owners), and ends with the cash you have now.

To run it, go to Accounting > Reports, find Statement of Cash Flows in the list (or type it into the report search), pick the date range and click Update. A month or a quarter is the most useful range for an owner; a full year is what your accountant uses.

It is the report to open when the Profit and Loss says one thing and the bank balance says another. For the full list of reasons those two numbers differ, see profit in Xero but no cash in the bank.

The three sections

Section	What goes in it	The question it answers
Operating activities	Cash received from customers; cash paid to suppliers, staff, landlords; GST, VAT or sales tax and income tax paid; interest	Does the business itself bring in more cash than it spends?
Investing activities	Buying or selling equipment, vehicles, property and investments	How much cash went into (or came out of) long-term assets?
Financing activities	Loans received and repaid, money the owners put in, drawings and dividends	How much cash came from lenders and owners, or went back to them?

Add the three together and you get the net change in cash for the period. Opening cash plus the net change equals closing cash, which should match the total of your bank accounts in Xero for the same date.

Xero’s standard report uses the direct method: it shows the actual cash received and paid, grouped by type, rather than starting from net profit and adjusting it (the indirect method most annual accounts use). An indirect version is not one of Xero’s standard reports for most subscribers, and is a long-standing request on Xero’s product ideas forum. For an owner the direct method is easier to read anyway, because every line is money that really moved. The cash flow statement example works one year both ways, so you can see how the two methods reach the same figure. If you are preparing financial statements under IAS 7 (AASB 107 in Australia), treat Xero’s grouping as a starting point and check it against your policy: the IAS 7 statement of cash flows guide lists what the standard requires and the adjustments to make.

Which section a line lands in depends on the account type in your chart of accounts. A vehicle coded to a fixed asset account shows under investing; the same vehicle coded to an expense account would show under operating and make trading look worse than it is. If a line looks out of place, the coding is usually why. Cash flow from investing and financing activities lists what belongs in those two sections, including loan repayments split into capital and interest and equipment bought on hire purchase.

A worked example

Made-up figures for one quarter in a small service business. The layout follows the report; your line names will follow your own accounts.

	Amount
Operating activities
Receipts from customers	$142,000
Payments to suppliers and employees	−$118,500
GST paid	−$9,200
Interest paid	−$600
Net cash from operating activities	$13,700
Investing activities
Purchase of a vehicle	−$24,000
Net cash from investing activities	−$24,000
Financing activities
Vehicle loan received	$15,000
Loan repayments	−$3,000
Owner drawings	−$6,000
Net cash from financing activities	$6,000
Net change in cash	−$4,300
Cash at the start of the quarter	$38,500
Cash at the end of the quarter	$34,200

How to read it, in order:

1. Operating cash is positive: $13,700. The business paid all its running costs, its GST and its interest from what customers paid, with money left over. This is the most important line on the report; cash flow from operations explains what goes into it and how to read it against profit.
2. The fall in cash is the vehicle, not trading. $24,000 went on a vehicle; the loan covered $15,000 of it, so the business itself funded $9,000.
3. Operating cash covers what goes to lenders and owners. Loan repayments and drawings came to $9,000, comfortably inside the $13,700 the business generated. If drawings plus repayments are bigger than operating cash quarter after quarter, the bank balance will keep falling however profitable the business looks.
4. Compare operating cash with profit. Say the Profit and Loss for the same quarter showed $21,000. Operating cash of $13,700 is $7,300 lower. In a service business the usual reason is customers paying more slowly, so the next report to open is Aged Receivables (see who owes me money?).

To run your own profit and Balance Sheet changes through the same reconciliation, use the free profit but no cash explainer. It works in your browser and does not need Xero.

Four checks to make every month

• Is operating cash positive? One negative month can be timing (a big tax payment, a slow customer). Three in a row means the business is spending more than it brings in, and the cash is being topped up by loans, owner money or the existing balance.
• Does operating cash cover loan repayments and drawings? If not, the gap comes out of your cash balance. How much can I pay myself? works out a figure the business can sustain.
• Is operating cash well below profit? Look at receivables and stock first. The debtor days calculator shows how much cash slow payers are tying up.
• How long does the closing cash last? If cash is falling, divide the closing balance by the average monthly fall. The free cash runway calculator does this and shows how much longer the cash lasts if customers pay on time. To check one period’s net cash flow, or work it out for a period before Xero, the free net cash flow calculator splits cash in and out into the same three sections, and cash inflow and outflow examples lists what belongs in each. Operating activities minus the equipment bought in investing activities is your free cash flow, the cash available for drawings and loan repayments; the free cash flow calculator works it out and says what it means, and discounted cash flow shows how a buyer would value it.

For a quarterly or half-year review that puts an amount against each cause (slower customers, stock, tax, drawings), see cash flow analysis for a small business, which works through six checks on a worked example.

When the numbers look wrong

The report only knows about money that went through bank accounts set up in Xero, as recorded in Xero. Before trusting it, check:

• Unreconciled bank lines. Statement lines waiting in the reconcile screen have not been recorded yet, so they are not in the report. Reconcile up to the end of the period first.
• Missing accounts. A credit card, a savings account or a payment provider account that is not set up in Xero is invisible to the report. Spending on a card that is not in Xero makes operating cash look better than it is.
• Transfers coded as income or expenses. A transfer between two of your own accounts should be a transfer. Coded to an expense, it shows as a payment to a supplier.
• Closing cash does not match the bank. Compare the closing figure with the bank balances on the Balance Sheet for the same date. If they differ, something above is the cause.

Statement of Cash Flows, Bank Summary or Balance Sheet?

Report	Best for
Statement of Cash Flows	Why cash changed over a period, grouped into trading, assets and financing
Bank Summary	Opening balance, cash received, cash spent and closing balance for each bank account
Cash Summary	Cash in and out by account (sales, each expense, drawings, loans), with GST or VAT on its own line (what each line means)
Balance Sheet (two dates side by side)	Which balances changed: money owed to you, bills you owe, stock, loans, tax (how to read it)
Profit and Loss	Whether the business earned more than it cost, before timing; see how to read your Profit and Loss in Xero

The Bank Summary is quicker if you only want totals in and out. The Statement of Cash Flows is better when you want to know whether the business funds itself or is being funded by loans and owners. A Profit and Loss switched to cash basis sits in between: it shows trading income and costs as they were paid, but leaves out loans, drawings, asset purchases and tax payments (see cash vs accrual in Xero). All three look back; for the next 30 days, Xero’s short-term cash flow projects the balance from invoices and bills due.

Common questions

Is the Statement of Cash Flows a cash flow forecast? No. It only shows cash that has already moved, for dates in the past. For what is coming, Xero’s short-term cash flow looks 30 days ahead from invoices and bills due, and a 13-week cash flow forecast goes further.

Why is operating cash different from my net profit? Profit counts sales when you invoice them and costs when you are billed; the Statement of Cash Flows counts them when the money moves. Customers who have not paid yet, stock you have bought but not sold, GST or VAT you collected and have not paid over, and bills you have not paid yet all open a gap. In the worked example above, $21,000 of profit became $13,700 of operating cash.

Where is depreciation? It is not on the report, because no cash moves when you depreciate an asset. The cash left when you bought the asset, and that shows under investing activities in the period you paid for it. Depreciation only appears on the Profit and Loss, which is one reason profit and cash differ in a year with large asset purchases.

Where do drawings and dividends show? Under financing activities, with money the owners put in and loans received or repaid. They are not a cost of running the business, so they never reduce operating cash or profit, but they do reduce the cash you have.

Is a fall in cash for the period a bad sign? It depends which section caused it. A fall caused by buying equipment or repaying a loan early can be a deliberate choice. A fall because operating cash is negative, month after month, means the business is spending more than it brings in.

Why does GST or VAT show under operating activities? The tax you collect from customers and the tax you pay suppliers pass through your bank account with each sale and purchase, and the payment to the tax office is part of running the business. A large GST or VAT payment in one month can make operating cash negative for that month without anything being wrong; how much to set aside for tax shows how to plan for it.

Getting the answer every Monday instead

Most owners do not want to run a cash flow statement; they want to know whether cash is going up or down and why. 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.