How to prepare a cash-flow statement

Know what it is — and isn't

A cash-flow statement reports the real movement of cash through your business over a completed period, reconciling your opening bank balance to your closing one. It is one of the three core financial statements alongside the profit and loss and the balance sheet, and for larger companies it is a statutory part of the accounts.

Crucially, it is backward-looking — a record of what happened — which is what separates it from a cash-flow forecast that projects what will. Because profit is calculated on the accruals basis, a profitable company can still show shrinking cash; the statement is where that gap becomes visible and explainable.

Build the operating section

The operating section captures cash from your core trading — usually the largest and most telling part. The simplest route is the indirect method, which starts from profit and adjusts it back to cash:

1. Begin with your operating profit for the period.
2. Add back non-cash costs such as depreciation, which reduce profit but move no money.
3. Adjust for changes in working capital — a rise in debtors or stock consumes cash; a rise in creditors releases it.

This is where slow-paying customers bite: strong profit can become weak operating cash flow if your working capital cycle is tying money up.

Add investing and financing

The remaining two sections cover cash outside day-to-day trading. Investing records money spent on or received from longer-term assets — buying equipment or vehicles out, selling an asset in. Financing records cash to and from funders and owners:

• Loan drawdowns in, loan repayments out.
• Capital introduced by shareholders, or dividends paid out.
• Interest paid, depending on presentation policy.

Together the three sections explain every pound of movement. Sum them and you get the net change in cash, which should tie exactly to the difference between your opening and closing bank balances — the built-in accuracy check.

Read what it's telling you

A built statement is only useful once you interpret it. The healthiest pattern is positive operating cash flow — the business funding itself from trading rather than from borrowing or selling assets. Persistent negative operating cash flow propped up by the financing section is a warning sign worth acting on early.

Read the working-capital movements especially closely: a recurring drain there points to collections or stock problems you can fix directly, by cutting debtor days or tightening stock. If trading genuinely consumes cash through a long cycle, that is the textbook case for a flexible working-capital facility rather than a structural worry.