How to Read a Cash Flow Statement: A Founder's Guide
A cash flow statement splits cash movement into operating, investing and financing activities. Read in that order, it shows whether the business funds itself, where cash goes and how much comes from outside.
- Operating
- Cash from running the business: customer receipts less payments to suppliers, staff and tax
- Investing
- Cash spent on or received from long-term assets such as equipment or software
- Financing
- Cash from or to lenders and shareholders: loans, repayments, equity, dividends
15+ years in finance: 100+ financial models built, €40m+ raised for clients, Forbes contributor and lecturer.
Short answer: a cash flow statement shows where your cash came from and where it went, in three blocks: operating, investing and financing. Read the blocks in that order and you can tell whether the business funds itself or depends on outside money.
The three sections
Operating activities show cash from running the business: money received from customers, less payments to suppliers, employees and tax. This is the most important block. It answers a simple question: does the core business produce cash?
Investing activities show cash spent on, or received from, long-term assets such as equipment, software development or acquisitions. Negative numbers here are normal for a growing company.
Financing activities show cash moving between the business and its lenders or shareholders: new loans, loan repayments, equity raised, dividends paid.
| Section | Typical inflows | Typical outflows |
|---|---|---|
| Operating | Customer payments | Suppliers, payroll, tax |
| Investing | Sale of assets | Equipment, capitalised development |
| Financing | Loans, new equity | Repayments, dividends |
How to read it in practice
- Start with operating cash flow. Is it positive, negative or improving?
- Compare it with net profit. A large gap usually points to receivables, inventory or payment timing. See profit vs cash flow for why this happens.
- Check investing. Is the spend building capacity you need, and can operations fund it?
- Look at financing. If financing covers a negative operating result, you are running on outside money, and the length of that funding matters. Our guide to startup runway explains how to measure it.
- Check the closing balance. It should match the bank balance on your reconciliation.
Direct and indirect methods
The direct method lists real receipts and payments. The indirect method starts with net profit and adjusts for non-cash items, such as depreciation, and for changes in working capital. Both give the same total. Most accounting software produces the indirect version, which is useful for seeing why cash differs from profit.
What it will not tell you
A historical statement describes the past. It does not show next month's payroll against next month's receipts. For that you need a forward view, such as a 13-week cash flow forecast. Use the statement to understand how cash behaved, and the forecast to decide what to do next.
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Related questions
What is the difference between direct and indirect cash flow statements?
Both reach the same total. The direct method lists actual receipts and payments. The indirect method starts from net profit and adjusts for non-cash items and changes in working capital.
Should operating cash flow be positive?
Over time a healthy business generates positive operating cash flow. Early-stage or fast-growing companies may be negative for a period, and then the question is how long the funding lasts.
How often should I look at it?
Monthly is a sensible default, alongside a short-term forecast that looks ahead.
