The cash flow statement, sometimes called the statement of cash flows, is one of the three main financial statements, along with the balance sheet and income statement, that every company must draft periodically.

The cash flow statement is a summary of all the money flowing into and out of your company over the specified period of time. It also tells you how the money is flowing in an out. That’s important because cash in is not necessarily good and cash out is not necessarily bad.

Accurate and up-to-date cash flow statements are essential for both large and small businesses. The good news is that you don’t need to be an accounting guru to grasp the fundamentals of this financial principle.

In this article, we are going to explain cash flow in detail and then how it is all placed on the cash flow statement. Next, we will walk you through the Amazon cash flow statement, followed by a prepared example specifically geared towards a SaaS business.

Finally, we will show you how specialized software can automatically generate your cash flow statement from the information readily found on your balance sheet and income statement. That’s the first step in easier, more accurate cash flow modeling and financial forecasting.

What is a cash flow statement?

Cash flow is the money moving into and out of your business. It is different from a lot of other accounting principles as it is completely separated from your company’s profitability or value.

The sole consideration in cash flow is the actual physical cash entering or leaving your company. Please note that physical shouldn’t be taken too literally, as it also includes money transferred into and out of your bank accounts, credit cards, and so on.

In a business, we differentiate among the cash flow from operating activities, investing activities, and financing activities. These three terms are actually the sections on a cash flow statement.

Let’s take a look at what cash flows are found under the headings cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities.

Cash flow from operating activities

Operating activities are generally understood as the normal, day-to-day operations of a business. If you sell cupcakes, operating activities will include selling cupcakes or buying the sugar and flour to bake your cupcakes.

In this way, cash flow from operating activities includes all the money coming into and leaving your business due to these normal, day-to-day processes. The following are some examples of cash flows from operating activities:

  • Cash flow in: The main, and sometimes only, cash flow in from operating activities is the receipt of cash from the sale of goods or services. Note that receipt of cash is used instead of revenue  because sometimes revenue is recorded before cash is received or cash is received before revenue is recorded.
  • Cash flow out: Expenses are the main outflows of cash from operating activities. These can include interest payments, tax payments, rents, payments to suppliers, and so on. For SaaS companies, hosting fees and subscriptions to needed business software are common ways cash flows out of the company due to operating activities. Note that only cash expenses are listed on the cash flow statement, which means depreciation and amortization are not included. We’ll discuss this more below.

Cash flow from investing activities

When you hear investing activities, you probably first think about stocks. Cash flow from investing activities definitely includes the sale or purchases of stocks, but that’s not all. While the investing activities of individuals are often limited to stocks, those of a business are more diversified.

The investing activities of a business can also include the purchase or sale of large assets. Assets are things of value the company owns. Your company might purchase physical assets such as an office building or large server to carry out its business. These are usually referred to as tangible assets because you can touch them.

You might also buy intangible assets, which are things you cannot touch, such as new software that improves your platform or a patent. Here are some examples of cash flows from investing activities:

  • Cash flow in: The sale of securities (stocks), land, or old assets are common positive cash flows from investing activities.
  • Cash flow out: Negative cash flows from investing activities are essentially the opposite of the cash flows in. These include the purchase of stocks or new assets such as a building or equipment.

Cash flow from financing activities

Financing activities are how a company is funded. This includes equity and liability financing. For example, a company can use a bank loan to finance operations, or the owners can invest more of their personal savings into the business. Some examples of cash flow from financing activities are as follows:

  • Cash flow in: The company opening a new loan or the owners putting more money into the business are examples of positive cash flows from financing activities. An initial public offering (IPO) or issuing new stocks is also a positive cash flow from financing activities.
  • Cash flow out: Issuing a dividend is a good example of a negative cash flow from financing activities. Repaying a loan is another example. The company could also repurchase some of its stock to increase its stock price. In all of these cases, the cash flowing out of the company would be a signal the company is doing well.

How to calculate cash flow

A company’s cash flow can be calculated using either the direct or indirect method. Both options are permitted by the generally accepted accounting principles (GAAP). However, many small businesses prefer the indirect method.

Calculating cash flow with the direct method

In the direct method, you need to record all the cash as it enters and leaves your business. This is a huge added bookkeeping burden because you need to keep two separate general ledgers, one for all of the activities and another just tracking the cash transactions.

Not only is this method more time consuming than the indirect method, but you will still need to do some of the indirect method. Reconciling the cash flow statement to the income statement must still be done following the indirect method.

Calculating cash flow with the indirect method

The indirect method starts with the cash from operating activities. The net income (or loss) is taken from the income statement, and then the accountant works backwards by removing all of the non-cash revenue and expenses and adding in all of the revenue that has not be recognized and expenses that have not yet been incurred.

The cash flows from investing and financing activities are straightforward in both the indirect and direct methods. Since they are cash transactions, there is no special accounting magic to be performed.

What is a cash flow statement?

A cash flow statement shows you how much cash is entering and leaving your business over a given period. Cash flow statements complement the other financial statements.

The key components of cash flow statements are cash from operating activities, investing activities, and financing activities. These are detailed above, but if you are still a little confused the examples below should clear things up.

How do cash flow statements compare to income statements and balance sheets?

The cash flow statement is intrinsically related to the balance sheet and income statement. In fact, if you have your balance sheet and income statement in front of you, then you have all the information required to draft your cash flow statement.

However, there are some key differences, and they relate to each other in special ways.

Cash flow statement vs. balance sheet

The balance sheet is a snapshot of the book value of a business on a specific date in time. It shows all of the assets on one side and all of the liabilities and equity on the other.

The cash flow statement shows how cash has flowed over a period of time. Since the balance sheet shows things on a day instead of over a period, it is easier to draft an accurate cash flow statement if you have the balance sheet from the start of the period as well as the one from the end of the period in front of you.

For example, if you are drafting a cash flow statement for the year of 2021, then you should have your December 31st, 2020 and December 31st, 2021 balance sheets at the ready.

The differences in owner’s equity and liabilities, as well as those for depreciation and amortization if applicable, will directly affect your cash flow statement. We’ll see this a bit more clearly when we look at the Amazon example.

Cash flow statement vs. income statement

The income statement and cash flow statement reveal information about the company for a period of time. The income statement presents all of the revenue and expenses over a period of time, as well as the final net income (or loss).

Revenue recognition rules (primarily ASC 606) mean that sometimes the money is in your account before you have earned it or you’ve earned the revenue but not yet received the payment. The same can be said about when you pay for expenses versus when they are incurred.

That means that the cash flow from operating activities are similar to the revenue and expenses found on the income statement but not the same.

An income statement provides a breakdown of all the funds that have entered and left your business. This discrepancy is one of the hardest parts of drafting accurate and audit-proof cash flow statements.

Example cash flow statement

Take a look at the example below: Amazon’s 2016 statement of cash flow. There’s a lot of information that can be gleaned from this cash flow statement.

First, the top of every financial document should show four things: the company name (Amazon), the type of statement (consolidated statements of cash flows), the timeframe (the years ended December 31st 2014, 2015, and 2016), and the currency (in millions).

A consolidated statement is simply one that has multiple periods on it. In this case, Amazon wants to show how their cash flow has changed over a three-year period.

As mentioned above, there are things on the income statement that need to be adjusted for the cash flow statement. We call this “reconciling” the two documents.

The first is removing/adding any revenue and expenses to match the cash flows mentioned above. The trickier one is dealing with depreciation and amortization. These are the ways that assets are turned into expenses.

Let’s say you buy a laptop for $2,000 that you expect to last five years. Tax authorities allow you to claim a depreciation expense of ($2,000/5) $400 per year. However, this isn’t a cash expense. (Note that this is a simplified linear depreciation example. Depending on the asset class and your location, you may be required to calculate depreciation differently. Please consult your accountant.)

The cash flow occurred as an investing activity because you bought an asset. The yearly depreciation is just a tax-reduction system, and no money is changing hands. That means all depreciation needs to be added back from the income statement.

The same is true for amortization, only the assets are intangible, for example relationships, contracts, or patents.

The red lines highlight the next cash flows from operating, investing, and financial activities. At the bottom, we can see that Amazon’s cash position has steadily climbed over this period from around $9 billion at the end of 2013 to $19 billion at the end of 2016.

One final thing to mention is that negative numbers are shown in brackets. This is a standard accounting practice. If they were in red, then a black and white photocopy would be very confusing. Likewise, degraded copies can sometimes get random marks on them that might look like minus signs.

Figure 1. Amazon’s Statements of cash flow for 2014–2016. Source: amazon.com

Figure 1. Amazon’s Statements of cash flow for 2014–2016. Source: amazon.com

Example SaaS cash flow statement

Here’s an example of a typical SaaS cash flow statement. The first difference you can see is that the numbers are much smaller, in the thousands. Next, this cash flow statement is for a single year.

As is typical for single year statements, subtotals are found in a middle column and totals in the right column, while individual numbers are in the left column. This improves the readability of the document.

As is common for startups, this one is pretty lean. There aren’t many large equipment purchases and the values of financing activities—equity and loans—are rather small. Conversely, there is substantial cash flow in from customers and out from typical expenses. This includes labor, hosting services, and so on.

Overall, the company is cash flow positive and is at little risk of unexpected expenses crushing their profitability.

ABC Corporation

Cash Flow Statement

Year Ended December 31st, 2021 (in 000s)

Cash Flow from operating activities

Cash received from customers

$90

Cash paid to suppliers, staff, and employees

($40)

Cash generated from operating activities

$50

Interest paid

($4)

Taxes

($18)

Net cash flow from operating activities

$28

Cash Flow from investing activities

Equipment purchases

($5)

Equipment replacement

($3)

Proceeds from equipment sales

$1

Net cash flow from investing activities

($7)

Cash Flow from financing activities

Proceeds from capital contributed

$3

Proceeds from loans

$2

Loan payments

($7)

Net cash flow from financing activities

($2)

Net increase/decrease in cash

18

Cash at beginning of the period

$25

Total cash at end of period

$33

What does a cash flow statement tell you about your business?

A cash flow statement helps you determine your enterprise’s overall strength, profitability, and long-term viability.

It helps you gauge your level of liquidity, or, in other words, whether you have sufficient cash to pay your expenses. Shareholders and investors look closely at a company’s cash flow statements and use them to determine the organization’s overall financial health.

Cash flow statements also provide a means to predict your future cash flow, which is helpful for budgeting. In addition, if you have your sights set on applying for a loan or a line of credit, you’ll need to provide up-to-date financial statements to your lender.

Benefits of cash flow planning for SaaS businesses

Good cash flow planning is invaluable for any company, and subscription-based businesses are no exception. Here are a few specific benefits for your SaaS business:

  • If you can accurately visualize and track your expenses, you’ll be able to quickly identify any inconsistencies and eliminate unnecessary expenses, ultimately increasing your profit.
  • Having a clear line of sight into your liquidity parameters gives you the information you need to optimize your outgoing and incoming money streams.

SaaS-specific cash flow problems

There are several persistent cash flow-related problems that most SaaS business owners face from time to time. Let’s look at some of them.

Balancing payment terms

Depending on your business model, your customers’ credit terms may extend to 30 or 60 days. All too often, however, you’ll have bills that need to be paid immediately or within a few weeks, which can upset your cash flow. For this reason, it’s a good idea to set up an upfront payment structure for customers wherever possible.

This problem can arise when your accounts receivable terms are more generous than those of your accounts payable. Accounts receivable are recognized revenue from customers who haven’t paid you yet. Accounts payable are incurred expenses that you haven’t paid yet.

If your customers tend to pay months after they’ve used your services, consider negotiating better terms with your suppliers to match your cash flows in and out.

Getting a handle on accounts receivable

Accounts receivable can easily get out of hand if you aren’t strictly watching out for late payments. In fact, most companies consider payments 30 days late 25% uncollectible, which then rises over time to 100% uncollectible at 120 days late.

That’s why it’s sensible to set up an automated billing mechanism to ensure your customers pay you on time. Automating reminders to customers to alert them of the upcoming billing cycle is also helpful in reducing the chance of payments failing.

If customers’ payments don’t go through (due to expired credit cards, insufficient funds, or other issues), you can put a dunning system in place to remind customers to update their payment information.

Customer churn

As SaaS businesses are inherently subscription-based, when a customer stops using your software or doesn’t renew their subscription, it’s going to negatively impact your cash flow and liquidity. You should be as proactive as possible about reducing customer churn.

One way to reduce customer churn is to maintain a dialog with your customers that helps you understand the features they want and then develop them.

Look to advanced SaaS analytics solutions like Baremetrics to understand which customers you’re losing and why, and then move quickly to take countermeasures. The higher your customer retention rate, the better your longer-term cash flow will be.

Sign up for a free trial and start and get a better handle on your cash flows.

Burn rate

Burn rate measures how quickly your company is losing money. It can be expressed as a percentage of the total cash you have on hand or as the number of months of cash you have left.

Especially getting from the pre-revenue phase through to “ramen profitability” can be difficult. One of the best ways to stretch your cash flows during this time is to use subscription services yourself. That way you turn larger upfront costs, from expensive software to servers, into manageable monthly expenses.

Create better cash flow statements with Baremetrics by Flightpath

Did you know that Flightpath by Baremetrics can generate your cash flow statements automatically? This removes tedious and difficult accounting tasks including reconciling your cash flow statement to the income statement.

If you’re looking for profit and loss, cash flow, balance sheets and business metrics all in the same tool, look no further. You should sign up for Flightpath by Baremetrics and start financial modeling now.