What Is a Cash Flow Statement? Bookkeeping Guide

A cash flow statement explains how cash and cash equivalents changed during a period. It classifies movements into operating, investing and financing activities and reconciles opening cash to closing cash.

Bookkeeping supplies the bank, ledger and transaction data, but the statement requires accounting analysis because not every receipt is income and not every payment is an expense.

The three cash-flow categories

Operating activities

Operating cash flow relates to the principal trading activities, such as:

• cash collected from customers;
• payments to suppliers and employees;
• operating expenses;
• tax payments, subject to the reporting framework; and
• working-capital movements.

Investing activities

Investing cash flow commonly includes:

• purchases and sales of equipment or property;
• acquisition or disposal of investments;
• business acquisitions; and
• loans made to other parties and repayments received.

Financing activities

Financing cash flow shows changes in funding, such as:

• new share capital or owner funds;
• bank borrowing;
• repayment of loan principal;
• lease-related payments under the applicable framework; and
• dividends or owner distributions.

Simple cash-flow example

If opening cash was £7,000, closing cash is £35,000.

Why profit and cash differ

Profit uses accounting recognition rules; cash flow follows cash movement. Differences arise because:

• sales may be unpaid at year end;
• supplier bills may remain unpaid;
• stock purchases use cash before the stock is sold;
• equipment purchases are capitalised rather than expensed immediately;
• depreciation reduces profit but does not use current-period cash;
• loan proceeds increase cash but are not revenue;
• loan principal uses cash but is not an expense; and
• dividends use cash but are not operating expenses.

Direct and indirect methods

The direct method presents major cash receipts and payments, such as customer collections and supplier payments.

The indirect method starts with profit and adjusts for:

• non-cash items such as depreciation;
• gains or losses classified elsewhere;
• changes in debtors, creditors and stock; and
• cash flows assigned to investing or financing.

Both should arrive at the same operating cash movement when prepared consistently.

How bookkeeping supports the statement

Reliable preparation requires:

• fully reconciled bank and card accounts;
• correct transaction dates and descriptions;
• separate loan principal and interest;
• fixed-asset purchase and disposal records;
• accurate customer and supplier ledgers;
• stock information;
• payroll and tax control accounts; and
• clear owner, director and dividend entries.

Cash flow statement versus forecast

A statement reports historical movements. A cash-flow forecast estimates future receipts, payments and balances.

Management should compare forecast with actual results and update timing assumptions for collections, payroll, VAT, tax, loan payments and capital spending.

Does every small company file one?

Whether a statutory cash flow statement is required depends on the reporting framework, company size and available exemptions. Many qualifying small entities may be exempt from including one in statutory accounts.

Even where not legally required, an internal cash-flow report is valuable for management, lenders and tax planning.

Working capital

Working-capital movements often explain why operating cash differs from profit:

• an increase in debtors consumes cash relative to profit;
• an increase in stock consumes cash;
• an increase in trade creditors temporarily preserves cash; and
• faster customer collection improves cash without changing the original sale value.

Common bookkeeping errors

• posting loan receipts as sales;
• posting all loan payments as interest expense;
• classifying asset purchases as routine costs;
• recording transfers between business bank accounts twice;
• including VAT incorrectly in net figures;
• omitting finance and payment-processor accounts;
• using unreconciled bank feeds; and
• confusing opening balances with current-period cash flow.

Cash-flow review checklist

• Reconcile opening and closing cash to bank evidence.
• Remove transfers between accounts from total inflows and outflows.
• Separate principal, interest and fees.
• Agree asset movements to the fixed-asset register.
• Explain working-capital changes.
• Check dividends and owner transactions.
• Review non-cash journals.
• Compare actual movements with forecast.

Frequently asked questions

Is a bank statement a cash flow statement?

No. A bank statement lists one account’s transactions. A cash flow statement consolidates qualifying cash and classifies movements across the business.

Can a profitable company run out of cash?

Yes. Slow customer payments, stock growth, loan repayments, tax and capital expenditure can consume cash despite accounting profit.

Does depreciation appear in cash flow?

It is non-cash. Under the indirect method it is normally added back when reconciling profit to operating cash flow.

Related guidance

See how bookkeeping affects financial statements and tax-planning records.