A cash flow statement answers a deceptively simple question: where did a company’s cash come from during a period, and what was it used for? That explains why the balance on the bank account changed between the start and end of a financial year — regardless of what profit the income statement reports.
This guide covers what a cash flow statement does, how it splits into three sections, how the direct and indirect method differ, and a worked example with generic figures. It closes by drawing a clean line between the cash flow statement, which looks backward, and cash flow forecasting, which looks forward.
What is a cash flow statement?
A cash flow statement is part of a company’s annual financial statements — in Germany, prepared under commercial law (the Handelsgesetzbuch, HGB), where a cash flow statement is mandatory for consolidated accounts and common practice for standalone ones too. It supplements the balance sheet and income statement with a pure cash view: what counts is only what cash actually moved in and out, not which revenues and expenses were booked to the period under accrual accounting.
Its purpose is to make the change in the cash balance traceable. The balance sheet and income statement alone don’t readily explain why a profitable company ends the year with less cash than it started with. The cash flow statement closes that gap by sorting cash movements systematically. The underlying logic of a cash movement is covered in more depth in how to calculate cash flow.
The three sections of a cash flow statement
A cash flow statement follows a clear structure based on where the cash movements originate. It distinguishes three sections, whose sum equals the change in the cash balance.
| Section | Origin | Examples |
|---|---|---|
| Operating cash flow | Day-to-day business | Customer payments, suppliers, wages, tax |
| Investing cash flow | Fixed assets | Buying or selling machinery, shareholdings |
| Financing cash flow | Equity and debt | Borrowing, repayment, capital injections, distributions |
Operating cash flow shows whether the core business generates cash under its own steam — it is the most informative of the three figures. Investing cash flow is usually negative in a growing company, because it is investing in fixed assets. Financing cash flow captures the cash traffic with banks and shareholders: borrowing and capital injections increase it, repayments and distributions reduce it. Add the three sections together and the opening balance, and the result is the cash balance at the end of the period. Subtract the part of investing cash flow that funds fixed-asset spending from operating cash flow, and the result is free cash flow — what remains after the investment the business needs.
The direct and indirect method
For operating cash flow there are two routes that arrive at the same answer: the direct and the indirect method. Investing and financing cash flow, by contrast, are always derived directly from the individual cash transactions.
The direct method sets all operating cash receipts directly against all operating cash payments for the period. It is intuitive, but it requires a cash-movement record that many companies don’t keep in that form.
The indirect method is more common in practice because it starts straight from the income statement. It begins with net income and strips out the non-cash items. The pattern:
- Non-cash expenses such as depreciation and additions to provisions are added back, because they reduced profit without costing any cash.
- Non-cash income — write-ups, for instance — is deducted.
- Changes in working capital are adjusted: a rise in receivables or inventory ties up cash and is deducted; a rise in trade payables frees up cash and is added.
This is the indirect method of deriving cash flow. It makes visible why a company can generate little cash despite a high net income — namely when that profit sits tied up in growing receivables and inventory.
LiquidityLens turns your real bank transactions, open items and accounting data into a week-by-week 13-week outlook — projecting your cash flow forward instead of just explaining it in hindsight.
See the Liquidity Control SprintWorked example: operating cash flow, indirect method
The example below shows operating cash flow under the indirect method. The figures are generic example values used only to illustrate the mechanics.
| Step | Example values (€) |
|---|---|
| Net income | 120,000 |
| + Depreciation | + 80,000 |
| + Increase in provisions | + 15,000 |
| − Increase in receivables | − 45,000 |
| − Increase in inventory | − 30,000 |
| + Increase in trade payables | + 20,000 |
| = Operating cash flow | 160,000 |
The example shows the principle: the €80,000 of depreciation reduced net income without costing any cash, so it is added back. The rise in receivables and inventory, by contrast, ties up cash and is deducted. The result is an operating cash flow noticeably above net income, because depreciation has the largest effect here. As a rule of thumb:
| Operating cash flow (indirect) | Net income + non-cash expenses − non-cash income ± working-capital change |
As informative as this calculation is, it describes a period that has already closed. The cash flow statement is part of the accounts and looks backward: it explains how cash has moved. Steering solvency, though, depends on when money will move next. That forward-looking view is exactly what cash flow forecasting delivers — not explaining cash flows in hindsight, but projecting them week by week, typically on a rolling 13-week horizon.
A weekly grid with receipts and payments and an automatic low-point warning — the bridge from the historical cash flow statement to forward-looking control.
Frequently asked questions
The most important questions on the cash flow statement are gathered at the end of this page.