What is a cash flow statement?

Filled in with actual figures, it shows what happened. Filled in with estimates for future months, it becomes a cash flow forecast, which warns of a shortfall before it happens. A common layout keeps both together: past months show actual figures beside the estimates made for them, and the months ahead stay as forecasts. Where an actual closing balance differs from its estimate, the line that caused the gap, such as slower customer payments or a larger supplier bill, shows which assumption to change next time.

Cash flow differs from profit because it follows when money actually moves, not when income is earned or costs are incurred. Some movements change the bank balance without touching that month's profit, such as the principal part of a loan repayment, or a customer paying an invoice that was counted as income the month before. Others count in profit before any cash moves, such as a supplier bill entered this month and paid the next. A profitable month can therefore end with less money in the bank than it started with.

Formal financial reports usually group the same movements under three headings: operating activities, such as customer receipts and supplier payments; investing activities, such as buying or selling equipment; and financing activities, such as loans received and repaid. A monthly cash flow statement for a small business is often simpler, with each type of money in and out on its own line. Even so, the three groups are a useful way to see whether day-to-day trading is producing cash or being propped up by borrowing.