Cash flow statement: where the money actually went

A cash flow statement shows the money that actually moved in and out of a business over a period, grouped by what caused it. It exists because profit and cash are different measurements: profit records revenue when it is earned and costs when they are incurred, while cash records them when the money moves. The gap between the two is where most small-business surprises live.

The question it answers is the one owners ask constantly: we made a profit, so where is it? The answer is usually a combination of unpaid invoices, stock, an equipment purchase and a loan repayment — none of which appear as costs in the profit and loss account.

The three sections

• Operating activities: cash generated by the trading itself — money received from customers less money paid to suppliers, staff and tax. This is the section that matters most, because it shows whether the business funds itself.
• Investing activities: buying and selling long-term assets. Equipment, vehicles, acquisitions. Usually negative in a growing business, and legitimately so.
• Financing activities: money from or to funders. New loans, repayments, capital introduced, dividends or drawings.
• The net movement, which reconciles the opening bank balance to the closing one. If it does not reconcile, the statement is wrong.
• The adjustments that make operating cash differ from profit: depreciation added back, movements in receivables, payables and stock.
• Non-cash items generally, which are the reason a profitable month can show negative operating cash.

Operating cash flow is the number to watch. A business whose operating cash is consistently negative while profit is positive is converting sales into receivables and stock rather than into money, and no amount of profitability makes that survivable indefinitely. Persistently positive operating cash, even with modest profit, is a much healthier position than the reverse.

Building one for a small business

1. Start with profit for the period from your profit and loss account.
2. Add back non-cash costs, principally depreciation and amortisation.
3. Adjust for the movement in receivables: an increase consumes cash, a decrease releases it.
4. Adjust for the movement in payables, which works the other way — an increase in what you owe holds cash.
5. Adjust for the movement in stock if you hold any.
6. That total is operating cash flow. Then list investing: what you spent on equipment or received from selling assets.
7. Then financing: loans drawn and repaid, capital in, drawings or dividends out.
8. Sum the three and check that opening bank plus the net movement equals closing bank. If it does not, something is missing — usually a loan repayment split between capital and interest.
9. Do this monthly and keep the series. One month is arithmetic; twelve months is a pattern you can plan against.

Statement, forecast, and the difference

The cash flow statement is historical: it explains a period that has finished. A cash flow forecast is the forward-looking version, built from expected receipts and payments with their real dates, and it is the more useful of the two for running a small business day to day. They complement each other — the statement tells you where the money went and, by doing so, calibrates the assumptions you put into the forecast. Companies that only forecast tend to repeat the same optimistic errors, because nothing ever compares the forecast against what happened.

Ettex Sheets is the practical place to build both: import an existing XLSX with formulas intact, one column per month with the three sections as blocks, formulas so operating cash and the net movement calculate themselves, conditional formatting to flag a month where the closing balance falls below your comfort level, charts for the twelve-month cash curve, and cell comments so an unusual movement carries its explanation. Version history keeps the forecast as it stood when you made a decision. The underlying figures come from Ettex Books — chart of accounts, bank reconciliation, multi-currency and P&L, balance sheet and ledger export — and the receivables detail behind the biggest adjustment sits in Ettex Invoices with a status on every invoice.

The boundary: Ettex does not produce a cash flow statement. Books exports the profit and loss, the balance sheet and the ledger; the cash flow statement is built from those in a spreadsheet, by you. There is no direct-method cash flow report, no forecasting engine, no scenario modelling and no bank feed. For a small business closing monthly that is a half-hour; if you need cash flow reporting generated automatically, that is a feature to look for elsewhere.

Where cash flow statements go wrong

• Built once for a bank and never again, so it never becomes a management tool.
• Loan repayments treated as a cost rather than split between interest and capital.
• Depreciation forgotten in the add-back, which understates operating cash.
• Equipment purchases shown as operating rather than investing, hiding whether trading pays for itself.
• Drawings and dividends omitted, which is common and makes the statement fail to reconcile.
• Tax payments ignored until they arrive.
• Not reconciling to the actual bank balance — the single check that proves the statement is complete.
• Producing a forecast but never comparing it with what happened.

A cash flow statement explains the difference between profit and the bank balance. Build it monthly from your profit and loss and balance sheet, watch operating cash, and always reconcile to the actual closing balance.