A cash flow statement records the money that actually moved in and out of your business over a set period, and reconciles the cash you started with to the cash you ended with. Alongside your balance sheet and your profit and loss account, it's one of the three core financial documents you'll use most often when you're running a company.

It's also the only one of the three that can't be flattered. Your profit and loss account counts a sale the day you invoice it, so a good year on paper can sit alongside a bank balance that has been falling for months. This is the statement where you find out why. And if your company is small, you almost certainly don't have to produce one – which makes it the statement nobody makes you file, and the one most worth reading.

‍

What a cash flow statement shows that your profit and loss account doesn't

Tracking cash in and out of your business is the foundation of basic financial management. You need to know what you earn, what you're spending, and what cash you actually have available, and only one of your three statements answers the last of those directly.

The gap between profit and cash is mostly made up of money you've earned and not yet been paid, stock sitting on your shelves, and things you've bought outright that the accounts spread over several years. None of those three stops you being profitable. All of them take cash out of the bank first and give it back later, which is why a growing company can be comfortably profitable and still run short.

How much that matters depends on how much cushion you have. Our research, published in April 2026, found that 28% of small businesses have two months or less of cash in reserve. With that much headroom, the bank balance is where you find out about a problem, and by then the decision has usually been made for you. It bites hardest in businesses with seasonal income, or where a handful of large customers make up most of the sales.

That is what the statement is for. It tells you whether your trading generates enough cash to service debt, which matters before you take any on, whether a shortfall is coming from your core operations or from something one-off, and whether you could fund new equipment out of your own cash rather than borrowing for it.

The three statements divide that work up between them:

‍

Whether your company has to prepare one

Under UK accounting standards, a statement of cash flows is part of a full set of financial statements. Section 7 of FRS 102 requires one, and requires it to be split into operating, investing, and financing activities.

Most small limited companies are outside that requirement. FRS 102 puts it in one line – 'a small entity is not required to comply with this section' – and the FRC's own factsheet on the statement of cash flows (November 2024) confirms that a company qualifying as small can take the exemption unless some other rule obliges it. Micro-entities go further: under FRS 105 their accounts are a balance sheet and an income statement, and a cash flow statement isn't part of them at all.

For financial years beginning on or after 6 April 2025, your company is small if it doesn't exceed two or more of these three limits: turnover of £15m, a balance sheet total of £7.5m, and 50 employees. It's a micro-entity if it doesn't exceed two or more of £1m of turnover, a £500,000 balance sheet total, and 10 employees. Both sets were raised, and the test is two out of three rather than all three, as the FRC's March 2025 amendment on UK company size thresholds sets out.

That exemption isn't changing. From April 2028, small companies and micro-entities will have to file a profit and loss account at Companies House and can no longer file abridged accounts, under changes Companies House confirmed in June 2026. A cash flow statement appears in neither filing list.

None of which means you shouldn't have one. It means producing one is a management decision rather than a filing obligation, so it's worth doing when it tells you something. Plenty of companies that are exempt from the annual version produce a cash summary monthly instead, as part of their management accounts. And if your company reports under international standards rather than UK GAAP, the rules are in IAS 7 instead and there is no small-company exemption – which affects listed companies and large groups, not the companies this page is written for.

‍

The three sections, and what belongs in each

The format separates your cash into groups so you can see which part of the business produced it. There are three, and the order is always the same.

Operating activities covers the cash your trading brings in and out: money in from customers, and money out to suppliers, staff, rent, and tax. This is the section that tells you whether your core business pays for itself, and the figure it ends on has a name and a page of its own – see operating cash flow for how each line in it is worked out and what the result means.

Investing activities covers what you spend on and receive from long-term assets: buying machinery, vehicles, or premises, and the proceeds when you sell them. It shows how much is going back into the business for future growth, and your operating cash flow less that spending is the measure known as free cash flow.

Financing activities covers money moving between the company and the people who fund it: new borrowing, repayments of loan capital, issuing shares, and dividends paid out. It shows how the business is funded, and it's the section that explains a healthy-looking bank balance that your trading didn't earn.

Two things that often get listed as a fourth section aren't one. Significant transactions that involve no cash – acquiring an asset under a lease, issuing shares to buy a business, converting debt to equity – are excluded from the statement under FRS 102 and disclosed in the notes instead, usually in the analysis of changes in net debt. And changes in working capital aren't a section either: they sit inside operating activities, which is where most of the difference between your profit and your cash gets explained.

‍

A cash flow statement for a small limited company

It's easier to see in pounds than in description. The company below is illustrative: a small limited company with about £1.3m of sales and a dozen staff, for the year to 30 September 2026. It's small enough to be exempt and it prepares one anyway, which is the position most readers of this page are in. It had a good year on paper.

Figures in brackets are cash leaving the business, which is how a set of accounts shows it.

The last three lines are the ones that make it a statement rather than a list. Add the three subtotals together – £41,000 in, £30,000 out, £36,000 out – and you get a £25,000 fall in cash, which is the net cash flow for the year. Add that to the £38,000 you opened with and you get the £13,000 you closed with. If it doesn't tie back to your bank statements, something is wrong with the statement rather than with the business.

And now the point of the whole exercise. This company made £84,000 of profit before tax and has £13,000 in the bank. Nothing went wrong: £46,000 of what it earned is sitting with customers who haven't paid yet, £30,000 went on a van and equipment, and £36,000 went to the bank and the shareholders. The profit and loss account shows the £84,000 and none of the rest. The balance sheet shows the £13,000 and not how it got there. Only this statement shows all of it at once.

The closing figure is cash and cash equivalents, not just the current account. Cash equivalents are short-term, highly liquid investments with very little risk of changing in value – normally only where the maturity is, say, three months or less from when you bought them. An overdraft repayable on demand that forms part of your day-to-day cash management counts too, as a negative.

‍

Direct or indirect: two ways to present the same figure

The three sections are fixed. The operating section can be presented in either of two ways, and FRS 102 allows both without expressing a preference.

The indirect method starts from a profit figure you already have and adjusts it: add back the costs where no cash left the business, adjust for the cash tied up in running it day to day, and take off the tax you actually paid. The direct method ignores the profit figure and adds up the cash itself – what you received from customers, and what you paid out to suppliers, to staff, and on everything else.

They reach the same answer. Here is the operating section of the worked example above, done both ways:

In practice the indirect method is the one you'll see. The FRC says so itself in the factsheet cited above: it's 'the method most commonly applied in the UK', and the FRC's own illustrative statement uses it. The reason is practical. The indirect method needs figures that are already in your accounts, and the direct method needs every cash receipt and payment recorded separately across the year, which most small companies don't keep that way.

So when a cash flow statement opens with a profit figure, that's the method at work rather than a claim that profit is a kind of cash. The adjustments underneath exist to strip out everything in that profit figure that wasn't cash.

The indirect method also shows you something the direct method hides. Set the two columns side by side and only the left one tells you why £84,000 of profit became £41,000 of cash – and here the answer is the £46,000 line.

‍

How to build one from the accounts you already have

You need three documents, and you probably have all of them: your profit and loss account for the year, your balance sheet at the end of the year, and your balance sheet from the year before. The previous year's balance sheet is the one people forget, and without it you can't work out a single working capital movement.

Then work through it in order:

1. Start with your profit before tax, from the profit and loss account.
2. Add back depreciation and amortisation. Both are in the profit and loss account, usually among administrative expenses or in the notes.
3. Work out what changed on the balance sheet. For each of debtors, stock, and creditors, take this year's figure and subtract last year's – closing minus opening, in that order, or every sign on your statement comes out backwards.
4. Apply those changes. Subtract an increase in debtors or stock, because that's cash you've earned or spent and can't use. Add an increase in creditors, because that's cash still sitting in your account. Reverse it for anything that fell.
5. Subtract the Corporation Tax you actually paid during the year, which is usually last year's bill. Tax is a real cash payment, not a non-cash adjustment.
6. List your investing and financing movements separately, from the fixed asset and loan notes rather than the balance sheet totals. You need the gross amounts: what you bought, what you sold, what you borrowed, and what you repaid.
7. Add the three subtotals, add the result to your opening cash, and check it against your closing bank balance.

Step 7 is the check that makes the rest trustworthy. Use the same accounting period throughout, and if the total doesn't match your bank statements, don't adjust the cash figure to fit – find the movement you've missed. Most accounting packages will produce this report from your ledgers, and your accountant can prepare one, which is usually the faster route the first time.

‍

What to look for when you read one

A finished statement answers four questions, roughly in order of how much they should change what you do.

• Which section produced your cash. Cash from operating activities is cash your trading earned. Cash from investing activities usually means you sold something, and cash from financing activities means you borrowed it or raised it. All three improve the bank balance and only the first one is repeatable.
• Whether operating cash flow tracks your profit, and which line explains the gap. A big gap is normal in a growing company. A big gap you can't account for is worth an afternoon.
• The direction over several periods, not one. One bad period in a business that knows why is ordinary. Three in a row, or a figure that falls while sales hold up, is a different signal – and if sales are holding up, the problem is usually collection rather than trading. That's the point to work through the cash flow problems behind it.
• Whether the closing cash covers what's due next. £13,000 in the bank is a different thing depending on whether next month holds a VAT return.

One reason to produce a statement you're exempt from is that somebody else may read it, and a lender is asking exactly the question it answers: does the trading generate enough cash to cover a repayment? At iwoca we look at your revenue and what your business can afford to repay before we make an offer, and our credit team reviews larger or more complex applications. You don't need a statutory statement of cash flows to apply – our credit models assess a wide range of information from just a few documents – but the cash story behind it is what we're reading. If you're waiting on an invoice, an iwoca Flexi-Loan – a business loan with flexible repayment options – can cover the gap, and you can clear it with no early repayment fee once your customer pays. It suits a gap with a clear end, rather than trading that doesn't cover its own costs.

‍

A statement looks back; a forecast looks forward

A cash flow statement covers a period that has finished. It is the best record you will get of how cash behaved in your business, and it will not tell you whether payroll clears next month.

If that's the question you came with, you want a cash flow forecast instead – the same three categories, projected forward week by week, so you can see a shortfall while you still have time to do something about it. The two work together: the statement tells you what your business actually does with cash, which is what makes a forecast worth believing. Turning either of them into a habit is the subject of cash flow management.

‍

How do I treat depreciation in a cash flow statement?

Depreciation is a non-cash expense: it spreads the cost of an asset across the years you'll use it, and no money leaves your account when it's charged. So under the indirect method you add it back to profit, as the worked example above does with £21,000.

The tax position runs the other way, and it's worth keeping the two apart. Depreciation of fixed assets isn't an allowable deduction for Corporation Tax – it's added back in the tax computation and capital allowances are given instead, as HMRC's Capital Allowances Manual sets out.

‍

Are there three types of cash flow statement?

No. There is one statement with three sections – operating, investing, and financing – and two accepted ways of presenting the operating one, the indirect and the direct method. The confusion comes from the three sections often being described as 'the three cash flows', which is a different thing from three kinds of statement.

‍

How often should I produce one?

Once a year if it forms part of your statutory accounts. If you're producing one to manage the business, monthly or quarterly works better, compared with the same period a year earlier rather than with last month. That way seasonal patterns and the months that carry a tax payment don't read as changes in the business.