Understanding your company’s cash flow statement can be the difference between navigating growth confidently and running out of money without warning. While income statements show how much profit you’re generating on paper, and balance sheets display what you own versus what you owe, the cash flow statement answers the most urgent question:
💰Do you have enough cash on hand to keep the lights on and fuel growth?
Cash is the lifeblood of any business, especially startups and small businesses. So let’s break down what a cash flow statement is, how to read it, and—most importantly—how to use it to make smarter, faster business decisions.
💵 What is a cash flow statement?
A cash flow statement tracks how money actually moves into and out of your business over a specific period of time—typically a month, quarter, or year. Unlike the income statement (which uses accrual accounting to recognize revenue and expenses when earned or incurred), the cash flow statement is purely about actual money in and money out.
It’s broken into three main sections:
- Operating Activities – The cash generated or spent through your day-to-day business operations.
- Investing Activities – Cash used to acquire or sell long-term assets like equipment or software.
- Financing Activities – Cash received from or paid to investors, lenders, and shareholders.
At the bottom, you’ll see your net change in cash over the period and your ending cash balance—which gives a real picture of how liquid your company is.
🧾 Why the Cash Flow Statement Matters
Let’s be real: startups don’t die because they’re unprofitable on paper—they die because they run out of cash. You can grow revenue and book large deals, but if that money hasn’t hit your bank account and your expenses are due, you’ve got a problem.
The cash flow statement gives you:
- Reveal True Financial Health – Unlike profit and loss statements, cash flow statements show how much actual cash is coming in and going out, helping you understand if your business can meet its obligations.
- Spot Potential Problems Early – They highlight cash shortages or timing gaps that might not be obvious from other financial reports, allowing you to take action before issues escalate.
- Support Smarter Decision-Making – Clear visibility into cash flow helps founders plan for growth, manage burn rate, and make informed decisions about hiring, investing, or fundraising.
Now let’s dive into how to read each section of the statement and what you should be looking out for.
1. Cash Flows from Operating Activities
This is the most important section for understanding whether your core business is healthy. It shows the cash generated (or consumed) by your normal operations. The section often starts with net income (from your income statement), but then adjusts for:
- Non-cash items like depreciation or amortization.
- Changes in working capital—things like accounts receivable (money owed to you), accounts payable (money you owe), and inventory.
Example:
Let’s say your income statement shows $20,000 in net income. But you also had:
+$5,000 depreciation (a non-cash expense).
-$10,000 increase in accounts receivable (customers haven’t paid you yet).
+$7,000 increase in accounts payable (you haven’t paid vendors yet).
Your cash from operating activities would be:
$20,000 + $5,000 – $10,000 + $7,000 = $22,000
This means your operations generated $22,000 in actual cash during the period.
Key Takeaways:
- Positive cash from operations = good: Your business is generating cash from its core activities.
2. Cash Flows from Investing Activities
This section shows the cash used for or generated from buying or selling long-term assets. It includes:
- Purchases of property, equipment, or software (cash outflows).
- Proceeds from selling those assets (cash inflows).
- Investment in other businesses or securities.
Example:
- Purchase of new servers: -$15,000
- Sale of old equipment: +$2,000
Net cash from investing: -$13,000
Key Takeaways:
- Negative investing cash flow is often good—It means you’re investing in the future.
- Positive investing cash flow can signal asset liquidation—which might be a short-term solution to a cash crunch.
Watch cash flows from investing activities in context A growing business may have negative cash flow from investing. This is okay if the business is performing well in its operations.
3. Cash Flows from Financing Activities
Here’s where you track the money coming in from or going out to investors, lenders, and shareholders. This includes:
- Proceeds from issuing shares or taking out loans.
- Repayment of debt.
- Dividend payments or stock buybacks.
Example:
- Loan received: +$100,000
- Repayment of earlier loan: -$20,000
- Investor equity funding: +$150,000
Net cash from financing: +$230,000
Key Takeaways:
- Positive cash flow from financing = funding coming in, often after a new round or loan.
- Negative cash flow = repayment of obligations or distributions to owners.
Founders should be careful if they notice they are raising money often while their cash flow is negative. This may not be sustainable.
4. Putting It All Together: Net Change in Cash
The final section of the cash flow statement shows your net increase or decrease in cash. It summarizes:
- Cash from operations
- Cash from investing
- Cash from financing
- = Net change in cash
Add this number to your starting cash balance, and you’ll get your ending cash position.
Example Summary:
Activity | Amount |
Operating Activities | +$22,000 |
Investing Activities | -$13,000 |
Financing Activities | +$230,000 |
Net Change in Cash | +$239,000 |
Starting Cash Balance | $100,000 |
Ending Cash Balance | $339,000 |
This tells you that your cash position improved substantially during this period, mostly thanks to a funding round.
🚩 Red Flags to Watch Out For
When reading your cash flow statement, don’t just glance at the final number. Dig in and look for warning signs:
- Growing net income but negative operating cash flow: You might be booking revenue without collecting the cash.
- Large increases in accounts receivable: Customers aren’t paying on time.
- Declining cash + negative investing + flat operations: You may be overinvesting without generating enough return.
- Consistently positive cash flow from financing only: You’re surviving on external money rather than operating strength.
📊 How to Use Cash Flow Insights in Real Life
Reading a cash flow statement isn’t just about numbers—it’s about action. Here’s how founders and operators can put it to work:
1. Manage Runway
If you’re burning $30K/month in cash and you have $300K in the bank, you have 10 months of runway. That helps you plan product launches, hiring, and your next fundraise.
2. Time Your Investments
Seeing a dip in operating cash flow? Delay that equipment purchase or headcount expansion until your next big customer payment comes in or financing round is complete.
3. Prepare for Fundraising
Investors want to see your cash position, your burn rate, and your ability to manage capital. A clean, easy-to-read cash flow statement makes you look financially disciplined and fundable.
4. Forecast Better
Use historical cash flow data to build rolling 13-week cash forecasts. This helps you spot bottlenecks, adjust quickly, and avoid surprises.
🧰 Tools and Tips for Managing Cash Flow
You don’t need to be a CPA to track cash flow well, but a few best practices can go a long way:
- Use accounting software like QuickBooks, Xero, or NetSuite that automatically generates cash flow statements.
- Hire a bookkeeper or fractional CFO if you don’t have one—accuracy is key. This team prepares the statement for you (time saving!) and helps you interpret it correctly.
- Build dashboards to visualize monthly trends, compare plan vs. actuals, and set alerts for low cash thresholds.
- Review regularly—monthly is a best practice.
💭 Final Thoughts
Your cash flow statement is more than a financial report—it’s a survival tool. It gives you the visibility to lead your company confidently, make smart tradeoffs, and avoid sleepless nights wondering if you can make payroll.
Profit might be the goal, but cash is the oxygen. Learn how to read your cash flow statement, and you’ll never be caught gasping for breath.
Click here to download our cash flow statement cheat sheet.
