How to Prepare a Statement of Cash Flow Step by Step
Have you ever wondered how to prepare a statement of cash flow without feeling overwhelmed by financial reports? Whether you’re a small business owner, entrepreneur, or manager, understanding your cash flow is one of the most valuable financial skills you can develop. A cash flow statement shows exactly how money moves through your business, helping you make informed decisions about spending, investing, and future growth. At Kigitz, we help businesses improve financial visibility through accurate reporting and fractional cfo services that transform financial data into practical business strategies. Learning how to prepare a statement of cash flow gives you greater confidence in your company’s financial health and helps you plan for long-term success.
How to Prepare a Statement of Cash Flow
Preparing a statement of cash flow involves collecting your financial records, organizing cash inflows and outflows into operating, investing, and financing activities, and calculating the net change in cash during a reporting period. The completed statement helps business owners evaluate liquidity, monitor financial performance, and make informed business decisions based on actual cash movement.
Although accounting software can automate much of this process, understanding each step helps you interpret your financial reports more effectively.
Step 1: Gather Your Financial Statements
Before preparing your cash flow statement, collect the financial documents you’ll need.
These typically include:
- Income statement
- Balance sheet
- Bank statements
- General ledger
- Accounts receivable records
- Accounts payable records
- Payroll records
- Previous cash flow statements
Having complete and accurate information ensures your cash flow statement reflects your actual financial position.
Step 2: Choose Your Reporting Period
Decide which period your statement will cover.
Most businesses prepare cash flow statements:
- Monthly
- Quarterly
- Annually
Monthly reporting provides the most timely information for monitoring cash flow and identifying trends before they become larger issues.
Step 3: Select the Direct or Indirect Method
There are two accepted methods for preparing a statement of cash flow.
Direct Method
The direct method records actual cash received and cash paid during the reporting period.
Examples include:
- Cash collected from customers
- Cash paid to suppliers
- Employee wages
- Rent payments
- Utility expenses
This method provides a straightforward picture of cash movement.
Indirect Method
The indirect method begins with net income and adjusts for non-cash transactions and changes in working capital.
Most businesses use this method because accounting software can generate it automatically using existing financial records.
Step 4: Organize Cash Inflows and Outflows
Next, classify every cash transaction into one of three categories:
- Operating activities
- Investing activities
- Financing activities
Proper classification improves reporting accuracy and provides a clearer understanding of where your cash comes from and how it is being used.
Step 5: Calculate Net Cash Flow
Once all transactions have been categorized, calculate:
- Total cash received
- Total cash spent
- Net increase or decrease in cash
This figure shows whether your business generated more cash than it spent during the reporting period.
Step 6: Verify the Ending Cash Balance
Finally, compare the ending cash balance on your cash flow statement with your balance sheet and bank records.
The numbers should reconcile accurately.
At Kigitz, our fractional cfo services help businesses review cash flow reports, identify inconsistencies, and ensure financial statements provide reliable information for decision-making.
What Are the Three Sections of a Statement of Cash Flow?
A statement of cash flow contains three main sections: operating activities, investing activities, and financing activities. Together, these sections explain how cash enters and leaves a business. Understanding each category helps business owners evaluate liquidity, monitor financial performance, and make more informed operational and strategic decisions.
Each section tells a different part of your company’s financial story.
| Section | Purpose | Examples |
| Operating Activities | Cash generated from daily business operations | Customer payments, payroll, rent, utilities |
| Investing Activities | Cash used to purchase or sell long-term assets | Equipment purchases, vehicle sales, technology investments |
| Financing Activities | Cash raised or repaid through financing | Business loans, owner investments, debt repayments |
Operating Activities
Operating activities represent the cash generated by your company’s primary business operations.
Common examples include:
- Customer payments
- Payments to suppliers
- Employee salaries
- Office expenses
- Utility bills
- Taxes paid
Positive operating cash flow generally indicates that your business is generating enough cash to support ongoing operations.
Investing Activities
Investing activities involve buying or selling assets intended to support future business growth.
Examples include:
- Purchasing equipment
- Buying property
- Investing in software
- Selling business assets
- Purchasing long-term investments
Negative cash flow in this section often reflects growth investments rather than financial problems.
Financing Activities
Financing activities show how your business raises and manages capital.
Examples include:
- Receiving business loans
- Repaying debt
- Owner contributions
- Dividend payments
- Shareholder distributions
Reviewing this section helps you understand whether growth is being funded through operations or outside financing.
Understanding all three sections together provides a complete picture of your company’s cash position and supports better financial planning. Businesses that regularly analyze these reports often gain additional value from fractional cfo services, which use cash flow data to improve forecasting, budgeting, and long-term financial strategy.
What Financial Documents Do You Need Before Preparing a Cash Flow Statement?
To prepare an accurate statement of cash flow, you’ll need several key financial documents, including your income statement, balance sheet, bank statements, general ledger, and accounts receivable and payable records. These documents provide the information needed to classify cash inflows and outflows correctly and ensure your cash flow statement reflects your business’s actual financial activity.
Preparing your documents before you begin saves time and reduces the risk of reporting errors.
Income Statement
Your income statement shows revenue and expenses during the reporting period.
Although it focuses on profitability rather than cash movement, it provides important information when using the indirect method of preparing a cash flow statement.
Balance Sheet
The balance sheet shows your business’s assets, liabilities, and equity at a specific point in time.
Comparing beginning and ending balance sheets helps identify changes that affect cash flow, such as increases in inventory, loan balances, or accounts receivable.
Bank Statements
Bank statements verify the actual movement of cash into and out of your business.
They help ensure that all deposits, withdrawals, transfers, and payments are accurately reflected in your cash flow statement.
General Ledger
Your general ledger contains every financial transaction recorded during the reporting period.
It provides the detailed information needed to classify transactions under operating, investing, or financing activities.
Accounts Receivable and Accounts Payable
Outstanding customer invoices and unpaid supplier bills influence your working capital and should be considered when preparing a cash flow statement using the indirect method.
These records help explain why profit and available cash are often different.
Payroll Records
Payroll expenses represent a significant cash outflow for many businesses.
Accurate payroll records ensure employee compensation, payroll taxes, and related expenses are properly reflected in your cash flow reporting.
Common Mistakes to Avoid When Preparing a Cash Flow Statement
Even experienced business owners can make mistakes when preparing a statement of cash flow. Understanding these common errors helps improve reporting accuracy and provides more reliable financial information for decision-making.
Confusing Profit With Cash Flow
One of the most common misconceptions is assuming a profitable business automatically has healthy cash flow.
Profit includes non-cash items such as depreciation and recognizes revenue before payment is received. Cash flow focuses only on actual money entering and leaving the business.
Misclassifying Transactions
Each transaction should be recorded under the correct category:
- Operating activities
- Investing activities
- Financing activities
Incorrect classifications can distort your financial reports and make cash flow trends difficult to interpret.
Forgetting Non-Cash Adjustments
Businesses using the indirect method must adjust for non-cash expenses such as depreciation, amortization, and changes in working capital.
Overlooking these adjustments produces inaccurate cash flow calculations.
Ignoring Reconciliation
Always compare your completed cash flow statement with your balance sheet and bank records.
Reconciliation helps identify missing transactions, duplicate entries, and reporting errors before financial reports are finalized.
Using Outdated Financial Records
Preparing reports using incomplete or outdated information can result in poor business decisions.
Maintaining current bookkeeping records ensures your cash flow statement accurately reflects your company’s financial position.
How Can Fractional CFO Services Improve Cash Flow Reporting?
Preparing a cash flow statement is only the first step. The real value comes from understanding what the numbers reveal about your business.
Our fractional cfo services help businesses move beyond reporting by transforming financial data into practical strategies that improve performance and support long-term growth.
With accurate cash flow information, a fractional CFO can help you:
- Build realistic cash flow forecasts
- Develop strategic budgets
- Improve working capital management
- Identify unnecessary expenses
- Monitor financial KPIs
- Plan for seasonal fluctuations
- Evaluate expansion opportunities
- Prepare for financing or investment
Rather than reacting to financial challenges after they occur, businesses gain the insight needed to anticipate risks and make proactive decisions.
At Kigitz, our fractional cfo services combine accurate bookkeeping with executive-level financial guidance. This integrated approach helps business owners improve profitability, strengthen cash flow, and confidently plan for future growth.
As your business becomes more complex, fractional cfo services provide the strategic leadership needed without the cost of hiring a full-time CFO.
Why Businesses Choose Kigitz
At Kigitz, we understand that accurate financial reporting is about more than compliance. It’s about giving business owners the confidence to make informed decisions backed by reliable data.
Our experienced team works closely with businesses to simplify bookkeeping, improve financial reporting, and develop strategies that support sustainable growth. Whether you need assistance preparing financial statements or ongoing fractional cfo services, we provide practical guidance tailored to your business goals.
Businesses choose Kigitz because we offer:
- Accurate bookkeeping and financial reporting
- Cash flow analysis and forecasting
- Budget planning and financial strategy
- Experienced accounting professionals
- Flexible fractional cfo services
- Scalable financial solutions
- Personalized business advisory
- Long-term financial partnership
We don’t simply prepare reports. We help businesses understand the story behind the numbers and use that knowledge to grow with confidence.
Frequently Asked Questions
What is the easiest way to prepare a statement of cash flow?
Using modern accounting software such as QuickBooks Online or Xero is often the easiest approach. These platforms can automatically generate a cash flow statement based on your recorded financial transactions while reducing manual calculations.
What is the difference between the direct and indirect methods?
The direct method reports actual cash received and paid during the reporting period. The indirect method starts with net income and adjusts for non-cash items and changes in working capital. Most businesses use the indirect method because it integrates easily with standard accounting systems.
How often should a cash flow statement be prepared?
Most businesses should prepare a cash flow statement every month. Monthly reporting helps monitor cash trends, identify potential shortages early, and support timely financial decisions.
Can accounting software generate a cash flow statement?
Yes. Most cloud accounting platforms, including QuickBooks Online and Xero, can generate cash flow statements automatically using your bookkeeping records. However, reviewing the report with a financial professional helps ensure accuracy and provides deeper business insights.
Final Thoughts
Learning how to prepare a statement of cash flow helps you understand one of the most important financial reports your business can produce. A well-prepared cash flow statement shows where your money comes from, how it is spent, and whether your business has the resources needed to operate and grow successfully.
While accounting software can simplify the preparation process, understanding how to interpret your cash flow statement allows you to make more informed decisions about budgeting, investments, hiring, and future expansion. Combined with expert fractional cfo services, your financial reports become powerful planning tools rather than simple historical records.
Ready to Improve Your Financial Reporting?
Preparing accurate financial statements is only the beginning. At Kigitz, we help businesses turn financial information into strategic decisions through expert bookkeeping, financial reporting, and CFO advisory.
If you want clearer financial visibility, stronger cash flow management, and a long-term growth strategy, schedule a consultation with Kigitz today. Our team can help you build reliable financial systems and provide the fractional cfo services needed to support your next stage of growth.
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