A cash flow statement reports cash inflows and outflows over a period, grouped into operating, investing and financing activities.
It explains how the opening cash balance becomes the closing balance and why profit and cash movement can differ. Return to the business plan glossary for related terms.
Formula and calculation
Closing cash = Opening cash + Operating cash flow + Investing cash flow + Financing cash flow
This simplified reconciliation assumes no foreign-exchange effect and uses cash and cash equivalents consistently. Operating activities relate to the business’s core activities, investing includes purchases and disposals of long-term assets, and financing includes borrowing, equity and repayments. Classification of interest and dividends depends on the accounting framework and policy; document it consistently.
Worked example: illustrative figures
Illustrative example: Bridge Repairs is a fictional service business. In one illustrative month it opens with $20,000 cash, collects $40,000 from customers and pays $32,000 of operating bills. It buys $10,000 of equipment, receives $15,000 from a loan and repays $3,000 of loan principal. Figures use one consistent currency, USD or CAD, and exclude interest, taxes and exchange movements for simplicity.
| Item | Amount |
|---|---|
| Opening cash | $20,000 |
| Operating: $40,000 − $32,000 | $8,000 |
| Investing: equipment purchase | ($10,000) |
| Financing: $15,000 − $3,000 | $12,000 |
| Net cash increase | $10,000 |
| Closing cash | $30,000 |
Total movement is $8,000 − $10,000 + $12,000 = $10,000. Closing cash is $20,000 + $10,000 = $30,000. The loan increases cash but is not sales revenue. The equipment purchase uses cash, although its full cost would not normally become an immediate operating expense.
How to interpret the result
The direct method shows operating receipts and payments. The indirect method starts with profit and adjusts for non-cash items and working-capital changes to arrive at operating cash flow. These are different presentations, not different cash balances. EBITDA is not operating cash flow because it omits several cash and timing effects.
Using this measure in a business plan
Use a monthly projected cash-flow statement alongside the projected income statement and balance sheet. Include invoice collection delays, supplier terms, inventory, equipment spending and financing. Reconcile closing cash to the balance sheet and test a slower-sales scenario; an annual surplus can conceal a monthly funding gap.
For help connecting assumptions to the financial statements, see our financial modelling services and business plan writing services.
Related glossary entries
Frequently asked questions
Is a cash flow statement the same as a cash forecast?
A historical statement reports past cash movements. A forecast projects future movements using stated assumptions. Both should reconcile opening cash to closing cash.
Why can profit be positive while cash falls?
Customers may not have paid yet, inventory may have grown or equipment and debt principal may have used cash. Accounting profit and cash movement answer different questions.
What are the three sections?
Operating, investing and financing activities. Keep classification consistent with the applicable accounting framework and reconcile the total movement to cash balances.