---
title: "Statement of Cash Flows Explained (With Example) | MCC"
description: "Operating, investing and financing activities in plain English, with a worked example from net income to cash."
url: "https://mcc-solutionsnj.com/bookkeeping/guides/statement-of-cash-flows-for-small-business"
---

Bookkeeping guide · Updated October 12, 2026

# Statement of Cash Flows: A Plain-English Guide

A business can show a profit and still run out of cash. The statement of cash flows explains why. It starts from profit and walks through everything that moved cash in and out, grouped into three clear sections.

By [Matthew Coleman](/about), MCC Solutions

**Quick answer.** A business can show a profit and still run out of cash because profit counts income when earned while cash counts money only when it moves. Invoice a large job in March and get paid in May, and March shows profit but no cash. The statement of cash flows explains the difference.

Want this handled for you?

Monthly bookkeeping, cleanup and year-end close for small businesses. Start with a free health check of your books.

[Free health check](/bookkeeping/health-check)[Get a quote](/bookkeeping/#interest)

**Related:** [Void vs delete a transaction](/bookkeeping/guides/voiding-vs-deleting-transactions) · [NJ 1099 contractor rule (ABC test)](/bookkeeping/guides/nj-independent-contractor-rule-abc-test-2026) · [Trial balance explained](/bookkeeping/guides/trial-balance-explained)

**Free tools:** [Free invoice template](/bookkeeping/free-invoice-generator) · [Mileage deduction calculator](/bookkeeping/mileage-deduction-calculator)

[![Intuit ProAdvisor Gold tier badge](/img/credentials/intuit-proadvisor-gold.png)](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77)Gold tier in Intuit's ProAdvisor program. [See my Intuit listing](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77)

Keeping your own books? Tallyfinch does invoices, bank import and reports on your computer. [See Tallyfinch](/bookkeeping/mcc-books-downloadable-bookkeeping-software)

## Why profit and cash are different

Profit counts income when earned and expenses when incurred. Cash counts money only when it moves. If you invoice a large job in March and get paid in May, March shows profit but no cash. If you buy a van, it is not an expense in full, yet your bank balance drops at once.

The cash flow statement reconciles these differences. It begins with net income and adjusts for the timing items, ending at the change in your cash balance for the period.

## Operating activities

This section covers the day-to-day business. It starts with net income, adds back non-cash items such as depreciation, and then adjusts for changes in working accounts. If receivables rose, cash was tied up, so the adjustment is negative. If payables rose, you held on to cash longer, so the adjustment is positive.

A healthy business usually generates positive cash from operations over time. If profit is strong but operating cash is weak, look at receivables and inventory first.

## Investing activities

Investing is about buying and selling long-term assets. Buying equipment, a vehicle or software with a long life shows as cash out. Selling an asset shows as cash in.

A young business may show negative investing cash flow for good reasons, since it is building capacity. What matters is whether the spending was planned and funded sensibly, not whether the number is negative.

## Financing activities

Financing covers money from lenders and owners. Loan proceeds, loan principal payments, owner contributions and owner draws all appear here. Interest paid is usually shown within operations, depending on the method used.

This section tells you how the business funded itself. If operating cash is negative and financing is bringing in cash every month, the business is living on borrowed or invested money. That can be fine for a launch, but not forever.

## How to use it

Read the three totals first and see how they add up to the change in cash. Then ask which section drove the change. A month with a large loan payment and a large equipment purchase explains a cash dip even in a profitable month.

Pair the statement with a forecast. If you know a big receivable is due and a large payment is coming, you can plan. Software can produce the report, but your CPA can explain unusual lines or choose the presentation method.

## A short scenario

A landscaping company has a profitable season and shows strong net income. But customers have not paid several large invoices, so receivables climbed. The company also bought a mower and made a loan payment. The cash flow statement shows operations contributed little, investing was negative and financing was negative, so the bank balance fell despite the profit.

Seeing it laid out this way points to the fix: tighten collections and time equipment purchases after cash arrives, rather than cutting costs that were never the problem.

## Worked example with numbers

Net income is $30,000. Add back depreciation $4,000. Receivables rose $6,000 (cash tied up), payables rose $2,000. Operating cash flow is $30,000 + $4,000 - $6,000 + $2,000 = $30,000. Equipment purchases of $12,000 are investing. A loan payment of $5,000 and owner draws of $9,000 are financing. Net change in cash: $30,000 - $12,000 - $5,000 - $9,000 = $4,000.

## Mistakes that cost money

Treating profit as cash. Ignoring loan principal. Leaving out owner draws.

## Check your work

The net change in cash must equal the change in the bank balances between the two balance sheets.

## Common questions

**Do small businesses need a cash flow statement?**

Many never produce one, but lenders and investors often ask for it. It is also a useful management tool.

**What is the difference between direct and indirect method?**

The indirect method starts with net income and adjusts it. The direct method lists actual cash received and paid. Most small business software uses indirect.

**Why is my cash flow statement empty or wrong?**

It depends on correct account types and reconciled bank accounts. Mislabeled assets or liabilities can throw it off.

This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.

Let us handle it

 [### Monthly bookkeeping Categorizing, reconciling and monthly reports, with cleanup, payroll and NJ filings available. Bookkeeping →](/bookkeeping/)
 [### QuickBooks Online Monthly bookkeeping, cleanup and reconciliation in QuickBooks Online for New Jersey small businesses. Your account stays in your name. QuickBooks →](/bookkeeping/software/quickbooks-online)[### Xero Bookkeeping and reconciliation in Xero for New Jersey small businesses, including cleanup and moving from spreadsheets or another program. Xero →](/bookkeeping/software/xero)

More guides

- [What Is a General Ledger and Why It Matters](/bookkeeping/guides/what-is-a-general-ledger)
- [How to Write a Journal Entry Step by Step](/bookkeeping/guides/how-to-write-a-journal-entry)
- [Accrued Expenses and Accrued Revenue Explained](/bookkeeping/guides/accrued-expenses-and-revenue-explained)
- [Prepaid Expenses and Deferred Revenue Basics](/bookkeeping/guides/prepaid-expenses-and-deferred-revenue)

Free tool

- [Bookkeeping health check](/bookkeeping/health-check)

 [All guides](/bookkeeping/guides)

Reach small business owners, freelancers and bookkeepers who read this guide: [advertise here](/advertise#bookkeeping).

Do it yourself

### Business Planning Bundle

Plan the cash, set the budget, price for profit and watch the monthly numbers, in four workbooks that use the same plain method.

[See what's inside ($79)](/toolkits/business-planning-bundle)14-day full refund

Excel workbook

### 13-Week Cash Flow Forecast

List what you expect to collect and pay, and see your cash balance each week, the lowest point and when it happens.

[See what is inside ($29)](/toolkits/cash-flow-forecast-13-week) [Try the free starter](/toolkits/cash-flow-forecast-13-week#free-starter)

Also in the [Business Planning Bundle](/toolkits/business-planning-bundle): 4 products for $79 instead of $106 separately.

Tallyfinch

### Books you keep on your own computer

Tallyfinch does invoices, bills, bank import, reconciliation and the main reports, in a file you own. $99 once, then $5 a month for updates; the app keeps working if you stop the plan. It does not do payroll or sales tax filing. The free download records up to 60 entries.

[See Tallyfinch](/bookkeeping/mcc-books-downloadable-bookkeeping-software) [Download it free](/tools/pro/trial/mccBooks) [Compare the three apps](/software)

## Rather have us keep the books? Ask for a quote.

[Get a Quote](/bookkeeping/#interest)[Call (908) 444-6373](tel:+19084446373)