Statement of cash flows

01

Three distinct activities

Operating cash flows relate to everyday trading. Investing cash flows include buying and selling long-term assets. Financing cash flows relate to owners’ funding and borrowing. This structure helps explain whether cash came from customers, a new loan or the owner’s savings. A positive closing balance funded by new debt is different from strong trading cash generation.

02

Direct and indirect approaches

The direct method groups actual operating cash receipts and payments. The indirect method starts from profit and adjusts for non-cash items and timing differences. Both should lead to the same operating cash flow when prepared consistently. Our workbook shows both routes as a learning check, with interest and income tax paid classified as operating in this simplified illustration.

03

Step 1 · Reconcile opening and closing cash

Start with reconciled balances for the defined cash and cash-equivalent accounts. A transfer between two included accounts is not new business income or expenditure. Check outstanding bank items and mobile-money fees. Agree the ending total to the statement of financial position. Restricted cash, overdrafts and foreign-currency effects may require specific treatment and disclosure.

04

Step 2 · Work out operating cash

In the example, sales of 60,000 less the increase in receivables of 6,000 gives customer collections of 54,000. Purchases of 38,000 less the increase in supplier payables of 5,000 gives supplier payments of 33,000. Deduct other operating cash payments of 18,000, interest paid of 1,000 and tax paid of 1,200. Operating cash generated is 800.

05

Step 3 · Add investing and financing

Equipment purchases use 12,000 cash. Capital introduced provides 10,000; borrowing provides 10,000; principal repaid uses 2,000; drawings use 3,000. Net financing cash is 15,000. Opening cash zero + operating 800 − investing 12,000 + financing 15,000 = closing cash 3,800. Non-cash asset acquisitions need separate consideration rather than being treated as a cash purchase.

06

Check with the indirect method

Profit 7,500 + depreciation 2,000 − receivables increase 6,000 − inventory increase 8,000 + supplier payable increase 5,000 + tax payable increase 300 = operating cash 800. The example has no other non-cash items or working-capital changes. For a real business, reconcile each adjustment to a schedule; do not assume every change in a balance-sheet account is a cash flow.

07

Why profit can coexist with a shortage

This business earned 7,500 but generated only 800 operating cash because customers still owe money and stock absorbed cash. Equipment spending then required substantial funding. Better collection terms, disciplined stock purchases and realistic payment scheduling may improve cash availability. Selling more on credit without planning collections can make the shortage worse.

08

Historical statement versus forecast

A cash-flow statement explains what happened. A weekly forecast estimates what may happen next. Build a 13-week forecast using expected collection dates, payroll, rent, suppliers, tax and debt payments. Use realistic timing and show a downside case. Never fill a projected shortfall with an unapproved loan as though funding is certain.

The statement at a glance

Gweru Trading · fictional first-year sole trader. Year ended 31 December 2026. All amounts in USD; parentheses indicate deductions or cash outflows.

Read the assumptions and explanations above. This simplified example omits items that may be necessary for your business.