Step-by-Step: How to Set Up a Cash Flow Statement (Free Template)

A business requires proper cash flow management to achieve lasting business success. Businesses that achieve financial success through their balance sheets fail to manage cash effectively which leads to their downfall. Why? The profits do not always translate into actual cash flow. A business with no system to track financial inflows and outflows will experience liquidity problems and delayed payments and difficulties paying necessary expenses even when generating high revenue.

The cash flow statement serves as the most important financial document for this particular case. The system provides organisations with complete financial visibility of their inflows and outflows which enables leaders to make strategic decisions through accurate financial information.

The guide provides a comprehensive overview of cash flow statements through its explanation of their significance and usefulness and its step-by-step instructions for creating statements and forecasting cash flow. The program offers users a free cash flow template and instant-use examples and expert advice. 

What Is a Cash Flow Statement?

A cash flow statement or statement of cash flows represents a financial document which displays all cash transactions between incoming and outgoing funds during a particular period. Unlike a profit and loss (P&L) statement, which includes non-cash items such as depreciation or amortisation, the cash flow statement only accounts for actual cash transactions.

The tool functions as a reliable liquidity assessment tool because it evaluates both short-term financial performance and operational stability of a company.

The cash flow statement functions as a business health assessment tool which reveals actual operational capabilities that go beyond profit indicators which show potential growth.

Why Is a Cash Flow Statement Important?

The process of monitoring cash flow operates as a survival system which performs functions that go beyond standard accounting operations. A cash flow statement that receives proper maintenance delivers multiple essential advantages.

• Avoiding cash shortages: One of the leading causes of business failure is running out of cash despite profitability. A cash flow statement functions as a tool to prevent this situation by monitoring liquidity levels.
  
• Identifying spending patterns – It highlights areas where money is being overspent or wasted, allowing businesses to cut unnecessary costs.
  
• Investor and lender requirement – Banks, investors, and tax authorities often require cash flow statements to assess financial health before offering funding or approvals.
  
• Strategic planning – Cash flow insights are essential for forecasting, budgeting, and making informed business decisions like expansion, hiring, or new investments.
  

In short, the cash flow statement isn’t just a compliance document, it’s a decision-making tool.

Key Components of a Cash Flow Statement

A standard cash flow statement is divided into three major sections:

1. Cash Flow from Operating Activities

This section tracks cash generated (or consumed) through day-to-day business operations. It gives a direct measure of whether the core business model is sustainable.

Typical Cash Inflows include:

• Revenue from product or service sales
  
• Interest received
  
• Tax refunds

Typical Cash Outflows include:

• Supplier payments
  
• Employee salaries and benefits
  
• Rent, utilities, and overhead costs
  
• Tax payments

Example: If a business generates $100,000 in sales revenue but spends $70,000 on salaries, supplier costs, and operating expenses, the net operating cash flow would be $30,000.

This number is often considered the most critical because it reflects whether the business can fund itself without external financing.

2. Cash Flow from Investing Activities

This section tracks long-term investments and the purchase or sale of assets. It shows how the company is reinvesting in itself or generating cash through divestments.

Cash Inflows include:

• Sale of equipment, property, or investments
  
• Returns from investments or securities

Cash Outflows include:

• Purchasing machinery, vehicles, or real estate
  
• Acquiring stakes in other businesses

Example: If a company buys a delivery van for $20,000, this would be recorded as a negative cash flow in the investing section because cash is leaving the business.

This section provides insights into growth strategies and how aggressively the company is reinvesting for the future.

3. Cash Flow from Financing Activities

This section highlights how the business is funded and how it manages debt and equity. It shows whether cash is coming from external financing or being returned to stakeholders.

Cash Inflows include:

• Bank loans or lines of credit
  
• Capital raised from investors

Cash Outflows include:

• Loan repayments
  
• Dividend payments to shareholders

Example: If a company takes a $50,000 loan but repays $10,000 during the same period, the net financing cash flow would be $40,000.

This section is particularly important to investors and lenders, as it indicates how the company balances borrowing with shareholder returns.

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

Creating a cash flow statement may seem complex, but by breaking it down into clear steps, you can prepare one confidently:

Step 1: Choose Between Direct and Indirect Method

• Direct Method – Lists every cash receipt and payment. It’s more detailed but time-consuming.
  
• Indirect Method – Starts with net income (from P&L) and adjusts for non-cash items and working capital changes. This is the most commonly used approach.

Step 2: Gather Financial Data

You’ll need:

• Bank statements
  
• Profit & Loss statement
  
• Balance sheet
  
• Invoices and receipts

Step 3: Calculate Cash Flow from Operating Activities (Indirect Method)

Start with net profit and adjust for non-cash expenses and changes in working capital.

Example Calculation:

Item	Adjustment
Net Profit	$50,000
+ Depreciation	+$5,000
– Increase in Accounts Receivable	–$8,000
Net Cash from Operations	$47,000

Step 4: Record Investing & Financing Activities

• Investing: Document asset purchases, property sales, or other investments.
  
• Financing: Record new loans, repayments, equity injections, or dividend distributions.

Step 5: Summarize Total Cash Flow

Combine results from all three sections to calculate the net increase or decrease in cash for the reporting period.

Cash Flow Forecasting: Predicting Future Cash Needs

A cash flow statement tells you where money has gone. A cash flow forecast helps you predict where money will go in the future. This is essential for anticipating shortages or planning expansions.

Here’s how to create one:

1. Estimate Future Income
   
   • Base sales projections on historical performance and current market trends.
     
   • Include expected payments from clients or contracts.
     
2. Forecast Upcoming Expenses
   
   • Fixed costs such as rent, salaries, and insurance.
     
   • Variable costs like inventory, utilities, and marketing.
     
   • Obligations such as taxes and loan repayments.
     
3. Analyze Cash Flow Trends
   
   • Compare forecasts with actual results monthly.
     
   • Adjust spending, financing, or collection strategies accordingly.
     

Example Forecast:

Month	Opening Balance	Cash In	Cash Out	Closing Balance
January	$10,000	$30,000	$25,000	$15,000
February	$15,000	$35,000	$30,000	$20,000

This helps businesses plan ahead, ensuring enough liquidity to cover obligations and seize growth opportunities.

Free Cash Flow Templates & Examples

To make implementation easier, we’ve created a free downloadable cash flow template in Excel and Google Sheets.

Here’s a sample cash flow statement:

Sample Cash Flow Statement

Category	Amount ($)
Operating Activities
Net Profit	$50,000
Adjustments	+$7,000
Net Cash from Operations	$57,000
Investing Activities
Equipment Purchase	–$15,000
Net Cash from Investing	–$15,000
Financing Activities
Business Loan	+$40,000
Loan Repayment	–$5,000
Net Cash from Financing	+$35,000
Net Increase in Cash	$77,000

This format allows any business to plug in its numbers and instantly see its liquidity position.

Common Cash Flow Mistakes to Avoid

A business requires proper cash flow management to survive in the market. Entrepreneurs and managers understand the value of cash monitoring yet they frequently miss important errors which create avoidable financial problems. The good news is that most of these issues are avoidable with awareness and discipline.The following section reviews typical cash flow mistakes businesses face as well as methods to stop them.

Mixing Personal and Business Finances

Small business owners frequently make a major error when they do not maintain distinct financial accounts for their personal and business activities. Using the same bank account or credit card for personal and business expenses seems practical at first but it leads to confusion as soon as you start operating.

The combination of personal and business expenses makes it challenging to follow money movement and generate reliable financial statements. The process of tax filing becomes more complex because you need to distinguish between your personal financial activities and business activities which leads to longer processing time and higher chances of errors.

Ignoring Small Expenses

The individual costs of office supplies and subscription fees and occasional company card payments seem insignificant when examined separately. The accumulation of these “invisible leaks” throughout time results in annual expenses reaching into the thousands of dollars. The quick expansion of these costs remains undetected by businesses which results in inaccurate cash flow statements. 

A $30 monthly subscription fee seems reasonable but when ten unused subscriptions exist it amounts to $3,600 in annual waste. The total amount of money spent on these hidden expenses will surprise you when you calculate them together. 

Failing to Update Forecasts

Businesses should avoid creating a cash flow forecast only to disregard it for extended periods of time. The business environment undergoes continuous changes because customers extend their payment times and organisations sign new contracts and operating expenses increase and sales patterns shift. A forecast that does not account for these changes will become outdated and unreliable in a short period of time.

An outdated forecast is almost worse than having no forecast at all because it creates a false sense of security. Business owners fail to recognise their financial requirements because they think they have enough money for expenses but end up short when actual costs surpass their initial estimates.

Overlooking Tax Obligations

Businesses should consider taxes as a typical financial issue which they can predict with ease. Businesses tend to mismanage their tax funds during periods of high business activity and financial success. The end result is that they do not prepare for tax deadlines so they face unexpected challenges when tax payments become due.

The failure to track cash flow properly leads to both cash flow problems and penalties and interest charges and damaged relationships with tax authorities. The additional expenses will create problems for businesses which currently operate with small profit margins.

Final Thoughts

A cash flow statement functions as more than financial data because it provides organisations with control capabilities. The system enables business owners to monitor their sustainability performance through metrics which extend past traditional financial performance indicators. A company can make strategic financial decisions about its cash flow when it knows where its money comes from and where it goes. The information helps businesses decide between using funds for expansion initiatives or reducing nonessential expenses or creating sufficient capital for operational needs.

For small businesses especially, strong cash flow management can mean the difference between thriving and merely surviving. Organisations can maintain stability through systems which provide dependable templates and exact forecasting and scheduled review processes when dealing with unexpected events such as delayed client payments and market economic shifts. A company that manages its cash flow effectively establishes trust with its investors and lenders and its employees.

Organisations need to develop future plans while keeping track of their present financial position to manage their cash flow effectively. The achievement of financial stability and long-term business success depends on proper cash flow management which involves error prevention and strategic tool utilisation and statement interpretation for decision-making rather than regulatory compliance.