The cash flow statement is one of three core financial statements, alongside the P&L and balance sheet. Where the P&L shows profitability and the balance sheet shows net worth, the cash flow statement shows liquidity — what cash actually moved and why.
The three sections
Operating activities covers cash from the core business. Investing activities covers purchases or sales of long-term assets. Financing activities covers loans taken or repaid, and owner distributions.
Direct vs. indirect method
The indirect method starts with net income and adjusts for non-cash items — it's the most common for small businesses. The direct method lists actual cash receipts and payments by category, which is more transparent but requires more detailed recordkeeping.
Why small businesses underuse it
Most small business owners focus on the P&L and ignore the cash flow statement. That's a mistake. It's the document that explains why a profitable business can still be broke.
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