Step-by-Step Guide to Preparing a Cash Flow Statement

If you've ever felt like your business is doing well but your bank balance doesn’t reflect it, you're not alone. The answer often lies in your cash flow. That’s where the cash flow statement comes in. It reveals what’s really happening with your money.

In this article, we’ll walk you through how to prepare a cash flow statement, break down the types of cash flow, explain what a cash flow statement shows, and explore the key uses of a cash flow statement for small businesses.

Whether you’re running a startup, a service-based business, or managing finances for clients, this guide is for you.

What is a Cash Flow Statement?

A cash flow statement is one of the three core financial statements, alongside the income statement and balance sheet. Its purpose is simple: to show the movement of cash in and out of your business over a specific period, usually a month, quarter, or year.

Unlike the income statement, which includes non-cash items like depreciation or unpaid invoices, the cash flow statement focuses purely on real cash transactions. It helps you answer one vital question: Do I have enough cash on hand to run my business?

What Does a Cash Flow Statement Show?

• A cash flow statement shows:

  • Where did your cash come from

  • Where your money was spent

  • How much cash did you have at the start and end of the period

  More specifically, it’s broken into three types of cash flow:

1. Operating Cash Flow

Covers the cash generated or used through regular business activities, such as customer payments, supplier expenses, wages, and overheads.

2. Investing Cash Flow

Includes cash used for or earned from long-term investments, such as purchasing equipment, vehicles, or property. It may also include proceeds from selling those assets.

3. Financing Cash Flow

Captures cash from loans, repayments, or equity investments. It shows how your business is funded beyond sales.

Together, these three categories show whether your business is cash positive or at risk of running short.

Why It Matters: Uses of the Cash Flow Statement

There are plenty of uses of a cash flow statement beyond ticking the box for your accountant. It helps you:

• Understand your liquidity

• Identify cash shortages before they become critical

• Forecast upcoming cash needs

• Justify funding or loan applications

• Make confident decisions about hiring, investing, or expansion

In short, if your business is growing or struggling, your cash flow statement is your early warning system or green light.

The Cash Flow Statement Format

The cash flow statement format is consistent across most accounting systems, though how it’s generated may vary. Here’s the standard structure:

• Inflows: Cash from customers
• Outflows: Payments to suppliers, wages, rent, utilities

• Outflows: Equipment or asset purchases
• Inflows: Sale of assets or investment returns

• Inflows: Loans, equity injections
• Outflows: Repayments, dividends, lease payments

• Sum of all three sections
• Compared with the opening balance to calculate the closing balance

This structure gives a clear snapshot of your cash position and how it has changed during the period.

How to Prepare a Cash Flow Statement (Step-by-Step)

If you’re using cloud accounting software, the statement is often generated automatically. But understanding how it's built helps you interpret it more effectively.

Here’s how to prepare a basic cash flow statement manually:

Step 1: Choose Your Reporting Period

Decide on the timeframe (monthly, quarterly, yearly). Monthly is ideal for cash flow monitoring.

Step 2: Gather Financial Records

Export income, expense, and bank transaction data. Ensure you’re working with actual cash figures, not just invoices or receivables.

Step 3: Record Operating Cash Flow

List all cash received from business operations (e.g. customer payments) and subtract cash paid for expenses (e.g. wages, rent, subscriptions).

Step 4: Track Investing Cash Flow

Include any cash used to purchase long-term assets (like a new van or computer) and any proceeds from selling such assets.

Step 5: Add Financing Cash Flow

Include cash received from loans or investor funding and subtract any repayments or dividends paid out.

Step 6: Calculate Net Cash Movement

Add up the totals from each section to find your net cash flow. Then, add your opening cash balance to get your closing balance.

What a Cash Flow Statement Tells You in Practice

Let’s say your income statement shows $10,000 in profit, but your bank balance is lower than expected. A closer look at your cash flow statement might reveal:

• You purchased $3,000 of new equipment
• $2,000 of customer invoices remain unpaid
• You repaid a $1,000 loan

That explains the gap—and helps you plan ahead.

How Pinch Helps You Keep Cash Flowing

Staying on top of cash flow starts with making sure money comes in reliably. That’s where Pinch makes a big difference.

With Pinch, you can:

• Set up automated payments for recurring invoices
• Collect payment via card or direct debit
• Offer payment plans to reduce large outstanding balances
• Sync payments and reconciliation with your accounting software
  
  

This means fewer late payments, less chasing, and a more stable cash position, giving you clearer insights when you look at your next cash flow statement.

Final Thoughts

Preparing and understanding a cash flow statement might sound like a job for the accountant, but it’s one of the smartest things a business owner or finance manager can master.

Knowing what a cash flow statement shows, how to use the standard cash flow statement format, and the different types of cash flow gives you visibility, foresight, and control. And when you combine that insight with tools that automate your payments and reconciliation, you're in a stronger position to thrive.

Want to make your cash flow predictable and painless? Discover how Pinch helps