What is a Cash Flow Statement?

By Michelle Nivera · 9 March 2015 · Updated 20 March 2026

A cash flow statement tracks the actual movement of cash into and out of your business over a specific period. It's divided into three sections: operating activities (cash from running the business), investing activities (cash spent on or received from long-term assets), and financing activities (cash from loans, owner contributions, or repayments). Unlike your profit and loss statement, which includes non-cash items like depreciation, the cash flow statement shows you what's actually hitting your bank account

What is a cash flow statement?

A cash flow statement is one of the three core financial reports every Australian business should understand, alongside the profit and loss statement and the balance sheet. It answers a question that neither of those reports can answer on their own: where did the cash come from, and where did it go?

This matters because profit and cash are not the same thing. A business can show a healthy profit on its P&L while running dangerously low on actual cash. This typically happens when revenue is tied up in unpaid invoices (receivables), stock is sitting in a warehouse, or the business has made large asset purchases that don't appear on the income statement as expenses. The cash flow statement closes that gap

The three sections of a cash flow statement

Every cash flow statement follows the same structure, whether you're a sole trader or a large company reporting under Australian Accounting Standard AASB 107

Cash flow from operating activities

This is the cash your business generates from its day-to-day operations. Cash in from customer payments, cash out for supplier invoices, wages, rent, and tax payments. This section tells you whether your core business model actually generates enough cash to sustain itself

Positive operating cash flow means your business is bringing in more cash than it's spending on operations. Negative operating cash flow over an extended period is a warning sign, whether that's because pricing is too low, expenses are too high, or customers are taking too long to pay

If you're using the indirect method (most small businesses do), this section starts with your net profit and adjusts for non-cash items like depreciation and changes in working capital like receivables and payables. Xero generates this automatically from your reconciled data

Cash flow from investing activities

This section tracks cash spent on or received from long-term assets. Bought a new vehicle, fitted out an office, purchased equipment, or invested in another business? Those cash outflows appear here. Sold an old asset? The cash inflow goes here too

A negative figure in this section isn't necessarily bad. It often means you're investing in the business for future growth. A construction business spending $80,000 on a new excavator is deploying cash for future revenue. The concern is when investing outflows are large and operating cash flow can't support them, forcing the business to rely on financing

Cash flow from financing activities

This section shows cash moving between your business and its funders: owners and lenders. Taking out a business loan is a cash inflow. Repaying that loan is a cash outflow. Owner drawings, dividend payments, and capital injections all appear here

For Australian small businesses, the most common financing activities are business loan drawdowns, loan repayments, and owner drawings. If this section shows large, ongoing inflows from borrowing while operating cash flow is negative, the business is funding its operations with debt rather than revenue. That's not sustainable

Cash flow vs profit: why the difference matters

The distinction trips up a lot of business owners. Your P&L says you made $100,000 profit for the quarter, but your bank balance barely moved. The cash flow statement explains why

Common reasons profit doesn't equal cash: your receivables grew (you invoiced more but collected less), you paid down debt (a balance sheet transaction, not a P&L expense), you purchased equipment (capitalised on the balance sheet, not expensed), or your inventory increased (cash went out the door but sits as an asset until sold)

We see this regularly with growing businesses. Revenue is increasing, the P&L looks great, but cash is tighter than ever because the business is funding more receivables, more inventory, and more equipment. The cash flow statement is the report that shows this happening before it becomes a crisis

How to use your cash flow statement

Reviewing your cash flow statement monthly helps you spot patterns before they become problems

Operating cash flow consistently positive - your core business is healthy and self-funding. This is the baseline you want to maintain
Operating cash flow negative for consecutive periods - investigate whether it's a timing issue (a large receivable about to land) or a structural problem (pricing, cost base, debtor management)
Large investing outflows - acceptable if operating cash flow supports it, or if you've planned the financing. Concerning if you're funding asset purchases through overdraft or credit cards
Financing inflows exceeding operating cash flow - the business is borrowing to fund operations, not growth. This needs attention

Viewing your cash flow statement alongside a cashflow forecast gives you both the backward look (what actually happened) and the forward look (what's coming). Together, they're the foundation of sound cash management

Cash flow and your BAS

For quarterly BAS lodgers, your cash flow statement helps you plan for the GST and PAYG payments that hit every quarter. If you know your operating cash flow pattern, you can set aside the right amount for BAS before the due date arrives rather than scrambling for cash at the end of each quarter. A registered BAS agent can help you integrate cashflow planning with your BAS schedule so there are no surprises

Getting your cash flow statement right

The accuracy of your cash flow statement depends entirely on the accuracy of your bookkeeping. If transactions aren't categorised correctly, if bank accounts aren't reconciled, or if invoices aren't recorded when they're issued, the cash flow statement won't reflect reality. Xero generates the report automatically, but it's only as reliable as the data feeding it

If your cash flow statement doesn't match your intuition about how the business is performing, the first place to look is your reconciliation. Are all bank accounts reconciled to date? Are receivables and payables up to date? Is depreciation running? Once the books are clean, the cash flow statement starts telling the truth. Your bookkeeping team can help get that foundation right

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Michelle Nivera

Mich is a CPA, BAS Agent, and self-proclaimed CEO of overthinking. She specialises in management reporting and has backup plans for her backup plans

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Common questions

A cash flow statement has three sections: operating activities (cash from day-to-day business operations like sales and supplier payments), investing activities (cash spent on or received from long-term assets like equipment and property), and financing activities (cash from loans, owner contributions, or debt repayments).

Profit and cash are different because the profit and loss statement includes non-cash items and timing differences. Common reasons include revenue tied up in unpaid invoices, large asset purchases capitalised on the balance sheet rather than expensed, inventory increases, and loan repayments which reduce cash but do not appear as expenses on the P&L.

Operating cash flow is the cash generated from your core business activities, including receipts from customers minus payments to suppliers, employees, rent, and tax. Positive operating cash flow means your business model is self-sustaining. Negative operating cash flow over consecutive periods may indicate pricing, cost, or debtor management issues.

Yes. Xero automatically generates a statement of cash flows from your reconciled data using the indirect method. The report starts with net profit and adjusts for non-cash items like depreciation and changes in working capital. The accuracy depends on your bookkeeping - all bank accounts must be reconciled and invoices recorded for the report to reflect reality.

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