A Bennett Financials Walkthrough With Fractional CFO Discipline
A cash flow statement answers one of the most important questions in business: Where did the cash go (and where did it come from)?
If you’ve ever looked at a Profit & Loss statement showing profit while your bank balance fell, you already know why this matters. The P&L shows performance based on accounting rules. The cash flow statement shows what actually happened to cash—and why. A cash flow statement is a financial report that details how cash entered and left a business during a reporting period, providing a clear picture of the organization’s cash flow.
At Bennett Financials, we often see growing businesses rely on the P&L alone. That’s fine early on, but as payroll grows, receivables increase, inventory expands, and debt enters the picture, cash flow becomes the difference between confident scaling and constant surprise. A fractional CFO helps make cash flow reporting consistent and decision-ready—so you’re not just tracking cash, you’re managing it.
When reviewing your cash flow statement alongside other financial statements, you gain access to essential financial data that helps you understand your company’s financial health and make informed business decisions.
This blog explains how to prepare a cash flow statement step-by-step, including the categories (operating, investing, financing), the two common preparation methods (direct vs indirect), the working capital adjustments most owners miss, and how to validate your statement so it ties to reality. Six FAQs are included at the end. If your business has hit $5M+, your controller can’t fuel your next stage—learn more about when to hire a fractional CFO.
Introduction to Financial Statements
A cash flow statement, sometimes referred to as a flow statement, is one of the three core financial statements every business owner should understand. Alongside the income statement and balance sheet, the cash flow statement provides a clear picture of how much cash is coming into and going out of your business during a specific period. Unlike the income statement, which focuses on profitability, or the balance sheet, which shows assets and liabilities at a point in time, the cash flow statement tracks actual cash inflows and cash payments. This makes it essential for assessing your company’s net cash flow and determining whether you have enough cash to cover financial obligations, invest in growth, or return value to shareholders. By reviewing the cash flow statement in conjunction with the other financial statements, you gain a comprehensive view of your company’s financial health and its ability to generate and manage cash.
What a cash flow statement is (and what it’s not)
A cash flow statement summarizes cash movement over a period (month, quarter, year) and breaks it into three sections:
- Cash flow from operating activities
- Cash flow from investing activities
- Cash flow from financing activities
This financial report is also known as a statement of cash flows and covers a specific accounting period, which is essential for determining accurate starting and ending balances.
It then reconciles to the change in cash:
Beginning cash balance + net change in cash = ending cash balance
Both the beginning cash balance and ending cash balance include cash and cash equivalents. The ending cash balance should reconcile with the company’s balance sheet to ensure accounting accuracy.
A cash flow statement is not the same as:
- a bank statement (transaction-level detail)
- a cash forecast (future-looking plan)
- a P&L (profitability, not cash timing)
You use the cash flow statement to explain historical cash movement. You use a forecast to predict and manage future cash.
A cash flow statement contains three key components: Operating, Investing, and Financing activities. Once cash flows generated from these three main types of business activities are accounted for, you can determine the ending balance of cash and cash equivalents at the close of the accounting period. It’s important to avoid reactive accounting, which can result in hidden costs and slow business growth.
Operating, investing, financing: the three cash “buckets” explained
Cash flow from operating activities (CFO/OCF)
Operating activities show how cash flows from a company’s core business operations.
This includes cash generated or used by your day-to-day business operations. For healthcare providers, understanding how your payer mix impacts margins is essential to optimize profitability.
- cash collected from customers
- cash paid to employees and vendors
- income tax payments
- changes in receivables, payables, inventory, and other working capital items
For most businesses, operating cash flow is the most important signal of long-term health.
Cash flow from investing activities (CFI)
Investing activities track cash movements related to long-term investments that affect a company’s growth.
This includes cash used for (or generated from) long-term assets—which are often best navigated with CFO advisor guidance:
- equipment purchases
- software implementation costs treated as assets (if applicable)
- vehicles, property, renovations
- business acquisitions
- proceeds from selling assets
Investing cash flow is often negative in growth phases—this isn’t always bad if it’s intentional and funded responsibly.
Cash flow from financing activities (CFF)
Financing activities show how a company raises and repays capital through debt and equity financing.
This includes cash from or to owners and lenders:
- loan proceeds (raising cash by borrowing)
- loan principal payments
- owner contributions (raising cash through equity)
- owner distributions
- investor funding (raising cash by issuing stock)
Financing cash flow explains how the business is being funded, including raising cash through issuing stock or borrowing, as well as repaying debts and distributing dividends.
Two methods to prepare a cash flow statement: direct vs indirect
There are two accepted methods for preparing a cash flow statement: the direct and indirect methods. Both methods are acceptable under generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). The main difference between cash accounting and accrual accounting is that cash accounting records transactions when cash changes hands, while accrual accounting records revenues and expenses when they are incurred, regardless of when cash is exchanged. This distinction impacts how financial statements, including the cash flow statement, are prepared.
The direct method provides a straightforward view of cash flow by listing actual cash receipts and payments during the reporting period.
The indirect method starts with net income from the income statement and adjusts it for non-cash items and changes in working capital.
The direct method
Lists actual cash receipts and cash payments, such as:
- cash received from customers
- cash paid to suppliers
- cash paid for wages
- cash paid for interest and taxes
The direct method presents actual cash receipts and payments from operating activities. To prepare the statement using this method, it is important to track each cash transaction in detail, as the method relies on accurate records of all cash transactions.
This method is intuitive, but many small businesses don’t prepare it manually because it requires clean cash categorization at the transaction level. Increasingly, businesses are turning to AI and automation to streamline their financial processes.
The indirect method (most common)
Starts with the company’s net income and adjusts for:
- non-cash expenses (depreciation, amortization)
- non cash transactions that do not involve actual cash movements
- changes in working capital (AR, AP, inventory, etc.)
- other non-operating items
The indirect method reconciles net income by adjusting for non cash transactions and changes in working capital to reflect the true cash flow. The Indirect Method involves adding back non-cash expenses and adjusting for changes in working capital to find operating cash flow.
Most accounting systems generate the cash flow statement using the indirect method, especially for monthly reporting.
Bennett Financials note: If you’re preparing this yourself and want the most practical approach, use the indirect method and make sure your balance sheet is reconciled first.
Before you start: what you need to prepare the statement correctly
Creating a cash flow statement involves gathering relevant financial data, choosing a preparation method, and categorizing cash flows into operating, investing, and financing activities.
To prepare a cash flow statement reliably, you need:
- financial data from a finalized P&L (income statement) for the period
- financial data from a beginning and ending balance sheet for the period
- identification of the starting cash balance at the beginning of the period
- clean reconciliations for cash accounts, including all bank accounts and credit cards
- clarity on any large one-time transactions (loans, owner draws, asset purchases)
Fractional CFO lens: A cash flow statement is only as accurate as your balance sheet. If the balance sheet is messy, the cash flow statement will be misleading.
Step-by-step: how to prepare a cash flow statement (indirect method)
Step 1: Start with net income
Take net income from your P&L for the period.
Example:
- Net income for the month: $40,000
This is accounting profit, not cash.
Step 2: Add back non-cash expenses
Add expenses that reduced profit but didn’t use cash in the period, such as:
- depreciation
- amortization
- certain non-cash adjustments (varies)
Example:
- Depreciation expense: $6,000. Learn more about maintaining accounting accuracy
Running subtotal:
- $40,000 + $6,000 = $46,000
Step 3: Adjust for changes in working capital
Now you adjust for balance sheet changes that affected cash.
The most common working capital accounts:
- Accounts receivable (AR)
- Inventory
- Prepaid expenses
- Accounts payable (AP)
- Accrued liabilities (payroll, taxes, expenses)
- Deferred revenue (if applicable)
Use the change from beginning to ending balance sheet.
Key rules:
- Increase in AR = cash outflow (you earned revenue but didn’t collect cash)
- Decrease in AR = cash inflow (you collected cash from prior sales)
- Increase in inventory = cash outflow
- Decrease in inventory = cash inflow
- Increase in prepaid expenses = cash outflow
- Increase in AP or accrued liabilities = cash inflow (you haven’t paid yet)
- Decrease in AP or accrued liabilities = cash outflow (you paid down liabilities)
- Increase in deferred revenue = cash inflow (you collected before earning)
Example working capital changes:
- AR increased by $18,000 → (18,000)
- Inventory decreased by $5,000 → +5,000
- AP increased by $12,000 → +12,000
- Accrued payroll taxes decreased by $4,000 → (4,000)
Working capital net adjustment:
- (18,000) + 5,000 + 12,000 − 4,000 = (5,000)
Operating cash flow subtotal:
- $46,000 − $5,000 = $41,000
This is your net cash provided by operating activities.
Step 4: Add investing cash flow
Now capture cash used for long-term investments.
Common investing lines:
- Purchase of equipment (capex)
- Purchase of software or other capitalized assets
- Proceeds from asset sales
Example:
- Equipment purchase: (20,000)
Net cash after investing:
- $41,000 − $20,000 = $21,000
Step 5: Add financing cash flow
Now record cash from lenders and owners.
Common financing lines:
- Loan proceeds: +
- Loan principal payments: −
- Owner contributions: +
- Owner distributions: −
Example:
- Loan proceeds: +30,000
- Loan principal payment: (8,000)
- Owner distribution: (10,000)
Net financing cash flow:
- 30,000 − 8,000 − 10,000 = +12,000
Net change in cash:
- $21,000 + $12,000 = $33,000
Step 6: Reconcile to beginning and ending cash
Now verify the statement ties out:
If beginning cash was $75,000:
- Beginning cash and cash equivalents: $75,000
- Net change in cash: +$33,000
The net cash flow for the reporting period is equal to the sum of cash flows from operating, investing, and financing activities. - Ending cash balance (including cash equivalents) should be: $108,000
If your ending cash balance (including cash equivalents) on the balance sheet is $108,000, your cash flow statement ties correctly.
Cash Flow Statement Example
To better understand how a cash flow statement works, let’s look at a simple cash flow statement example. Imagine a company that, over a quarter, reports a positive net cash flow from operating activities—meaning its core business operations are generating more cash than they consume. However, the same statement shows a negative net cash flow from investing activities, perhaps due to significant capital expenditures like purchasing new equipment or expanding facilities. Meanwhile, the company raises additional funds through equity financing, which increases its overall cash balance. This flow statement reveals not only how much cash the company is generating from its day-to-day operations, but also how it is investing for the future and funding its activities. By analyzing the cash flow from operating, investing, and financing activities, business owners and investors can make informed decisions about the company’s financial health, spot trends in cash flow activities, and assess whether negative net cash flow in one area is offset by positive flows elsewhere.
How to validate your cash flow statement (and catch common errors)
If the cash flow statement doesn’t tie to cash, the issue is usually one of these:
1) Balance sheet accounts aren’t reconciled
Unreconciled AR, AP, payroll liabilities, or credit cards can distort changes.
2) Transactions are misclassified
A loan payment principal portion classified as an expense, or equipment purchases coded as operating expenses, will scramble sections.
3) Owner transactions aren’t separated cleanly
Distributions and contributions should be financing activities, not operating expenses.
4) Payroll taxes and liabilities are messy
Payroll creates liabilities that must be tracked and reconciled. If payroll taxes are coded incorrectly, working capital adjustments become inaccurate.
Fractional CFO tie-in: Bennett Financials often focuses on clean close and balance sheet discipline first. Once that’s solid, the cash flow statement becomes reliable and repeatable.
What the cash flow statement tells you (how to interpret it)
A cash flow statement provides insight into different areas a business used or received cash during a specific period.
A prepared cash flow statement is more than compliance. It’s a diagnostic tool for assessing a company’s financial health.
Here are a few patterns that matter:
Positive cash flow indicates the company is generating more cash than it is spending, which is a sign of good financial health and sustainability.
Negative cash flow occurs when outflows exceed inflows and may signal inefficiencies or potential financial trouble, impacting the company’s financial health. Persistent negative cash flow can threaten a company’s sustainability if not managed properly.
Profit up, operating cash down
Often indicates:
- AR growing (slow collections)
- inventory building
- payables being paid down
- one-time working capital shifts
Operating cash strong, financing negative
Often indicates:
- the business is funding debt payments or distributions from operations
- potentially healthy, depending on cash buffers and growth needs
Operating cash negative, financing positive
Often indicates:
- the business is relying on loans/investment to cover operations
- not always bad in early growth, but risky if persistent
Investing cash very negative
Often indicates:
- heavy capex or expansion spend
- can be healthy if supported by forecasted returns and adequate funding
Best Practices for Cash Flow Management
Managing cash flow effectively is vital for maintaining your company’s financial stability and supporting long-term growth. Start by regularly reviewing your cash flow statement or flow statement to monitor trends and spot potential issues early. Use a cash flow statement template to ensure consistency and accuracy in your reporting. Focus on optimizing accounts receivable by encouraging prompt customer payments, and manage accounts payable to take advantage of favorable payment terms without risking supplier relationships. Keep an eye on non-cash expenses and look for opportunities to reduce unnecessary costs. When investing in long term assets, consider how these purchases will impact your cash position and plan accordingly. By following these best practices, you can ensure your business has enough cash to meet its financial obligations, respond to unexpected challenges, and invest in new opportunities for growth.
How Bennett Financials and a fractional CFO make cash flow statements more useful
Many businesses “have” a cash flow statement but don’t use it. A fractional CFO helps turn it into an operational tool by:
- ensuring monthly close produces reliable balance sheets
- separating operating vs investing vs financing correctly
- building a recurring interpretation cadence (“what changed and why”)
- linking cash flow statement insights to a 13-week cash forecast
- identifying the biggest cash drivers (AR, inventory, payroll timing)
- supporting decision-making: hiring, capex, distributions, financing
At Bennett Financials, we aim to reduce cash stress by making cash movement explainable and predictable.
