Staring at a page of cash numbers? Here is how to read a cash flow statement: check its three sections, then the net change in cash. The ending figure shows what actually moved through the business.
This guide is part of our wider look at business cash flow.
| Item | Value |
|---|---|
| Sections in a cash flow statement | 3 (operating, investing, financing) |
| Guide used by US GAAP companies | ASC 230 |
| Guide used by IFRS companies | IAS 7 |
| Example operating cash flow, 2023 | $63,456 |
| Example free cash flow, 2023 | $44,366 |
| Example net change in cash, 2023 | $68,200 |
The example figures come from a fictional farm in Ambrook’s July 2024 guide, and the standards from Sage’s July 2026 refresh of its guide. Figures and rules can change, so check the source before you rely on them.
The three sections of a cash flow statement
Sage’s guide says a cash flow statement shows how cash moves in and out of a business across three areas: operating, investing and financing activities (Sage). Each area answers a different question about where cash came from and where it went.
- Operating: cash flows from regular business, such as producing and selling goods and services, according to Ambrook.
- Investing: long-term purchases of physical assets such as equipment, vehicles, buildings and land.
- Financing: any cash flows that have to do with debt or equity, such as paying down a loan or paying a dividend.
The sign of a number does not tell the whole story. Decimal’s guide notes that a positive or negative figure tells you nothing unless you know where it is coming from, so always read the line behind the total (Decimal).
Which rulebook sits behind the layout depends on the company and its country. As of Sage’s July 2026 refresh, US-based companies using GAAP follow ASC 230 as a guide, while organisations using IFRS follow IAS 7 (Sage). Rules and terms vary by country, so check the statement’s notes.
Direct and indirect methods
There are two ways to prepare the statement. The direct method records each individual cash flow line by line, while the indirect method starts with net income and removes transactions that did not generate cash (Ambrook). Ambrook adds that many businesses prefer the indirect method because the direct method is time consuming.
This explains why many statements open with a profit figure rather than a bank balance. In Pilot’s sample company, SampleCo, the operating section starts from $19,600 and ends with $27,200 in net cash from operating activities (Pilot, June 2021). The gap is made up of the adjustments in between.
Reading an example: Ambrook Farm’s 2023 statement
Ambrook’s guide walks through a fictional agricultural business. Its operating cash flow was $63,456 in 2023, which Ambrook attributes to strong sales and low production costs (Ambrook).
The investing section is where the farm’s equipment spending shows up. It lists breeding livestock at $5,660 and machinery and equipment at $13,430, which Ambrook treats as capital expenditures.
From there you can work out free cash flow, which Ambrook defines as operating cash flow minus capital expenditures. For the farm that is $63,456 minus $19,090, or $44,366 in 2023.
The last figure to find is the net change in cash, which Ambrook labels total cash flow and says sits near the end of the statement. For the farm it was $68,200 in 2023. Decimal explains that the next line adds the starting cash to this change to give the ending cash for the period.
Notice how much of the operating section is made up of adjustments. Ambrook points out that this is typical of the indirect method, where net income is the first line and the adjustments that follow turn it into actual cash. In other words, the starting line is a profit figure, and the rest of the section shows how much of it really arrived as cash.
Ambrook also explains what free cash flow is for. It describes the figure as cash a business can use freely, whether on new investments, on distributions to shareholders, or kept as a cushion for the future. Whether any of those uses makes sense for a particular business is a decision for its owners and advisers, not something a statement can settle.
Read the farm’s figures in order: operating cash flow first, then the capital spending in the investing section, then the net change in cash. Each number answers a separate question. Did day-to-day activity produce cash, how much went into long-term assets, and where did the period end up overall?
A statement like this is especially useful when cash comes and goes unevenly. Ambrook says the cash flow statement is particularly useful for seasonal businesses and for those with periods of high cash inflows and outflows. The farm is fictional, so treat its numbers as a teaching example rather than a benchmark for any real business.
Why does cash flow differ from profit?
Sage’s guide warns that positive cash flow does not always mean profit, and negative cash flow does not always signal crisis (Sage). Our explainer on cash flow vs profit covers the gap in more detail.
Timing is a big reason. Ambrook says the adjustments in the operating section remove transactions that did not produce cash inflows, such as accounts receivable, and add back ones that did not produce cash outflows, such as accounts payable. If the term is new, the explainer on what is accounts receivable covers the basics.
Decimal makes a related point: because some exchanges happen on credit, a cash flow statement does not necessarily cover all of a business’s income and expenses (Decimal). That is why it works as a companion to the other reports rather than a replacement.
A step-by-step way to read one
- Find the ending cash. Starting cash plus the net change in cash gives the ending cash for the period.
- Check the operating section. This is the area Decimal calls the most useful for many small business owners, since it holds day-to-day cash transactions.
- Look for large investing items. Decimal notes that low or negative cash flows can come from investing in better facilities or operations.
- Read the financing section carefully. Decimal says high positive cash flow from financing likely means the company is taking on debt for further operations.
- Compare with other reports. Sage says reviewing the cash flow statement alongside the income statement and balance sheet gives the most complete picture of financial health.
These steps are a reading aid, not a verdict on any business. A single period can look unusual for good reasons, so context matters.
Frequently asked questions
What is a cash flow statement?
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It is a report of a business’s cash inflows and outflows during a reporting period. Sage notes it is also called a statement of cash flows and is one of the primary statements alongside the balance sheet and income statement (Sage).
Is positive cash flow always a good sign?
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Not necessarily. Sage’s guide says positive cash flow does not always mean profit, and negative cash flow does not always signal crisis, so the context behind the number matters (Sage).
What is free cash flow?
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Ambrook gives the formula as operating cash flow minus capital expenditures (Ambrook). It describes this as cash left over after operating expenses and capital spending.
Which standards guide the statement?
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As of Sage’s July 2026 refresh, US GAAP companies follow ASC 230 and IFRS companies follow IAS 7 (Sage). Which one applies depends on the company and country.
This page is for general information and education only and is not financial, investment, tax or legal advice.
