How to Read a Cash Flow Statement

Learn to analyze your business cash flow statement in 5 steps to track real money movement and spot operating problems.

1. Start with operating cash flow. Operating cash flow shows money from core business activities — sales collections minus operating expenses paid. This number should be positive and growing if your business model works. Negative operating cash flow means you're burning money on day-to-day operations.
2. Check the working capital changes. Look at accounts receivable, inventory, and accounts payable changes in the operating section. Growing receivables and inventory eat cash. Growing payables provide cash. A $50,000 inventory increase means $50,000 less cash, regardless of profits.
3. Review investing cash flows. Investing activities show equipment purchases, asset sales, and business acquisitions. Capital expenditures (CapEx) appear as negative numbers — money spent on assets. Compare CapEx to depreciation expense to see if you're maintaining or expanding capacity.
4. Analyze financing cash flows. Financing activities show loan proceeds, loan payments, owner contributions, and distributions. New debt or equity investment shows as positive. Debt payments and owner draws show as negative. Track your debt service coverage ratio here.
5. Calculate free cash flow. Subtract capital expenditures from operating cash flow to get free cash flow. This shows money available for debt service, growth investments, or distributions. Consistent positive free cash flow indicates a self-sustaining business model.