Cash Flow Statement Guide for 2026

A cash flow statement is a financial report that shows all the cash moving into and out of your business over a set period, grouped into operating, investing and financing activities. It tells you where your cash came from, where it went, and how much you have left, which is different from profit and gives you a true picture of whether your business can pay its bills.

Whether you are a business owner, an accountant, or an investor trying to understand a set of accounts, this guide breaks down everything you need to know about a cash flow statement, including a worked example, how it differs from a profit and loss account, and when your business actually needs one.

What does a cash flow statement show?

A cash flow statement shows the sources and uses of cash within your business over a reporting period, usually a month, quarter or year. It sits alongside your balance sheet and profit and loss account to give a complete view of financial health.

Rather than showing profitability, it shows liquidity. That means it answers a very specific question: does your business have enough cash on hand to cover what it owes, right now and in the near future.

A cash flow statement is typically used to:

Evaluate a company's liquidity position and short term solvency
Track how much cash is generated from day to day trading
Show lenders and investors how reliably a business converts sales into cash
Support cash flow forecasting and financial planning

The key components of a cash flow statement

Every cash flow statement is split into three sections. Each one tracks a different type of cash movement, and reading all three together tells you far more than any single number on its own.

1. Operating activities

Operating activities cover cash generated or spent through core, day to day trading. This includes cash received from customers, payments to suppliers, wages, rent and other running costs.

A positive operating cash flow is generally a strong sign that a business can fund itself from its own trading, rather than relying on borrowing or investor cash.

2. Investing activities

Investing activities cover cash spent on or received from long term assets, such as buying or selling equipment, property or investments. A negative figure here is not automatically a bad sign. It can simply mean the business is investing in growth, for example buying new machinery or opening a second site.

3. Financing activities

Financing activities cover cash movements between the business and its owners or creditors. This includes raising capital, repaying business loans, issuing shares, paying dividends and servicing debt. This section shows how a business is funded and how it manages its relationships with lenders and shareholders.

Cash flow statement example

Here is a simplified worked example showing how the three sections come together for a small trading business over one quarter.

Section	Example line items	Amount
Operating activities	Cash received from customers	£85,000
	Payments to suppliers and staff	negative £62,000
	Net cash from operating activities	£23,000
Investing activities	Purchase of new equipment	negative £15,000
	Net cash from investing activities	negative £15,000
Financing activities	Business loan drawdown	£10,000
	Loan repayments	negative £4,000
	Net cash from financing activities	£6,000
Total	Net increase in cash for the period	£14,000

In this example, the business generated healthy cash from trading, invested in new equipment, and used a small amount of finance to smooth the impact. The result is a net cash increase of £14,000 for the quarter, which is exactly the kind of figure a lender or investor would look for.

ash flow statement vs profit and loss statement

A cash flow statement shows whether your business can pay its bills, while a profit and loss statement shows whether your business is profitable. They answer different questions and neither replaces the other.

A profit and loss account uses accrual accounting, so it records revenue when it is earned and costs when they are incurred, regardless of when cash actually changes hands. A cash flow statement only records money that has actually moved in or out.

This is why a business can be profitable on paper and still run out of cash. Large unpaid invoices, upfront stock purchases or seasonal payment delays can all create a cash flow statement that looks very different to the profit and loss account for the same period.

	Cash flow statement	Profit and loss statement
Measures	Liquidity and cash movement	Profitability
Accounting basis	Cash basis	Accrual basis
Answers	Can we pay our bills	Are we making money
Includes non cash items	No	Yes, such as depreciation
Best used for	Short term financial planning	Long term performance review

Why is a cash flow statement important?

A cash flow statement matters because it shows the real, spendable cash your business has, not just the profit on paper. It gives stakeholders four things a profit and loss account cannot.

A realistic financial picture. A business can be profitable but still face cash shortages due to late payments or heavy upfront investment. The cash flow statement shows actual cash availability.
A way to assess sustainability. Consistently positive operating cash flow signals that a business can cover its running costs from trading, rather than from borrowing.
Better financial planning. It highlights when a cash flow gap is likely to appear, so a business can act before it becomes a problem, for example by arranging short term business finance in advance.
Stronger lender and investor confidence. Lenders and investors often review cash flow statements to assess the ability to repay debt and generate returns, and a healthy cash flow can improve a company's credit score.

As a business owner, understanding your cash flow statement gives you a much clearer read on your company's financial health and future prospects than the profit figure alone. For a closer look at the bottom line number itself, our guide on how to calculate net cash flow breaks down the formula step by step.

What are the different methods for preparing a cash flow statement?

There are two accepted ways to prepare the operating activities section of a cash flow statement, the direct method and the indirect method. Both arrive at the same net figure, but they get there differently.

	Direct method	Indirect method
Starting point	Actual cash receipts and payments	Net profit from the profit and loss account
Detail level	High, lists individual cash transactions	Lower, adjusts profit for non cash items
Data needed	Detailed cash transaction records	Standard financial statements already prepared
Common use	Larger businesses with detailed cash tracking	Most small and medium sized businesses

Direct method cash flow statement

The direct method lists cash receipts and payments from operating activities directly, such as cash received from customers and cash paid to suppliers. It gives a very transparent view of cash flow, but it requires detailed tracking of every cash transaction, which can be time consuming for smaller teams.

Indirect method cash flow statement

The indirect method starts with net income and adjusts it for non cash items, such as depreciation, and changes in working capital, such as debtor and creditor movements. It is less granular than the direct method, but it relies on figures you already have from your existing accounts, which is why most small businesses use it.

How to prepare a cash flow statement

Preparing a cash flow statement involves a clear set of steps to accurately capture how cash has moved through your business over a period.

Decide on the reporting period. Choose whether you are preparing the statement monthly, quarterly or annually.
Gather your financial data. Pull figures from your balance sheet, profit and loss account and transaction records, making sure everything is accurate and up to date.
Identify cash flows. Group every cash movement into operating, investing or financing activities.
Choose a method. Decide between the direct method or the indirect method for the operating activities section.
Organise the cash flows. Total each section to calculate the net cash flow for the reporting period.
Reconcile the figures. Check that the total cash flows from all three sections match the actual change in cash and cash equivalents on your balance sheet between the start and end of the period.
Review and finalise. Check the statement for accuracy and consistency before sharing it with stakeholders, lenders or your accountant.

Following these steps will give you a complete, reconciled cash flow statement and a clear understanding of your cash position for the period.

Do all businesses need to prepare a cash flow statement?

Not every UK business is legally required to prepare a cash flow statement. Under FRS 102, small companies that are not part of a group can claim an exemption and skip this statement in their statutory accounts. Larger companies and qualifying entities are generally required to include one, split into operating, investing and financing activities, as set out in Section 1A and Section 7 of FRS 102.

Even where it is not a legal requirement, most growing businesses choose to prepare a cash flow statement anyway. It is one of the clearest early warning systems for a cash flow gap, and it is often requested by lenders during a funding application regardless of company size.

Looking to boost your cash flow?

If your cash flow statement is showing a gap between what is coming in and what is going out, having access to flexible funding gives you room to act before it becomes a problem. At Capitalise, we work with a panel of 130+ business lenders to help match your business with the right option, whether that is bridging a short term shortfall or funding a larger piece of investment activity. Search for funding through Capitalise and one of our dedicated funding specialists will talk you through the options suited to your cash flow position.

What is a cash flow statement?