A full-service advertising agency

What We Do
Our Team
Dearing Group logo
Our Work
Contact
Dearing Group logo

Analyzing Cash Flow From Investing Activities in Financial Statements

Since it’s simpler than the direct method, many small businesses prefer this approach. For that reason, smaller businesses typically prefer the indirect method. The direct method takes more legwork and organization than the indirect method—you need to produce and track cash receipts for every cash transaction. If you use accrual basis accounting, income and expenses are recorded when they are earned or incurred—not when the money actually leaves or enters your bank accounts. A balance sheet shows you your business’s assets, liabilities, and owner’s equity at a specific moment in time—typically at the end of a quarter or a year. Tools and calculators to help you stay on top of your small business taxes and evaluate your financials

If your company sells a product, you probably have inventory. Some asset purchases can be expensed on the profit and loss statement immediately, while others need to be expensed slowly over many months or years. Both methods are viable and will give you the same result, but since the indirect method is most common (and it’s what we use at LivePlan) that’s what I’ll be covering today. It shows where cash is coming from and where you are spending money. Run out of cash, and you’re dead in the water—you can’t pay your bills or make payroll. Start planning today with our free one-page business plan template

How Long Does Cash Flow Statement Extraction Actually Take in 2026?

The cash flow statement acts as a corporate checkbook to reconcile a company’s balance sheet and income statement. To prepare a cash flow statement, choose between the direct and indirect methods for the operating activities section. The direct method for preparing the operating section of a cash flow statement may also be referred to as the income statement method. Determining cash flow from financing activities is a critical component of preparing a comprehensive cash flow statement. Here is the statement of cash flows example from our unadjusted trial balance and financial statements used in the accounting cycle examples for Paul’s Guitar Shop. Like all financial statements, the statement of cash flows has a heading that display’s the company name, title of the statement and the time period of the report.

If the company’s inflows of cash exceed its outflows, its net cash flow is positive. It reports a company’s cash inflows and outflows during a specific period. The indirect method starts with net income and adjusts for non-cash transactions. In contrast, a negative cash flow would indicate that the company used more money than it received, and may have had to dig into its reserves to cover its obligations.

There may be reasons why a company’s cash flows are schedule of accounts payable negative temporarily, like after making a large investment or capital purchase. Using the same values as above, here’s what the cash flow statement would look like prepared with the direct method. Then, you’ll combine this with the sections for investing and financing activities to prepare the full statement. From there, you’ll add up the total outflows, the total inflows, and find the difference between them to come up with the net cash flow from operating activities. This is especially the case for teams that use the indirect method, as they’ll need the net income from the income statement and the changes to balance sheet accounts to prepare the statement. Thus, both small businesses and large firms alike can use the indirect method for preparing a statement of cash flow.

Opening Cash Balance

You want positive cash flow from operations, not just from taking on more debt. Use historical data to forecast future cash flows. This should equal the change in your cash balance between the beginning and end of the period. This section reveals how you’re funding your business and whether you’re relying heavily on external financing or generating enough cash internally. For growing companies, this section often shows negative cash flow because they’re investing in their future. This section covers your day-to-day business operations—the activities that generate your primary revenue.

The direct method may provide more granular information about where the company’s operating cash flow stems from. The investing and financing activities sections are prepared the same way with either method. Importantly, these two methods only apply to the operating activities section of the statement. Reach out to Bob’s Bookkeepers for tailored tax and accounting support, including help preparing your cash flow statement. In-house teams might use the cash flow statement to inform short-term purchasing decisions or plan long-term strategic initiatives. Specifically, the statement of cash flows is meant to show the business’s different sources and uses of funds.

How Can my Company Improve Its Cash Flow?

This segment shows how a company raises and repays capital through debt and equity financing. High capex can indicate expansion, but excessive spending without strong operating cash flow may strain liquidity. Each segment provides a detailed breakdown of how cash is generated and used within a company over the stated period.

Tools to plan, fund, & grow your business

In practical terms, NTM EBITDA is often used in valuation multiples, such as EV/EBITDA, to compare companies across peers or time periods. A growing SaaS company projects $50 million in revenue over the next 12 months and assumes a 20% EBITDA margin during that period. This metric is especially useful when assessing a business that is undergoing major changes or a growth company that has not yet posted steady profits. Because of this, analysts may find that operating income is different than what they think the number should be, and therefore, D&A is added back to EBIT  to calculate EBITDA. They are a function of a jurisdiction’s tax rules, which are not really part of assessing a management team’s performance, and, thus, many financial analysts prefer to add them back when comparing businesses. Taxes vary and depend on the region where the business is operating.

Report of cash generated and spent for a certain period Cash-basis accounting is simpler for many small businesses, but some are required to file taxes using the accrual basis. If we only looked at our net income, we might believe we had $60,000 cash on hand. If you buy a $10,000 mower for your landscaping company, you lose $10,000 cash and get a $10,000 mower.

Final categorization of income and expenses for tax purposes is your responsibility. Any portions of a balance over $1,000,000 will not earn interest or have a yield. 4.00% APY applies to balances over $500,000 and up to and including $1,000,000. 2.25% APY applies to balances of up to and including $500,000. 1 Eligibility for cashback awards is available to Lili Pro, Lili Smart, and Lili Premium account holders only; applicable monthly account fees apply.

Creating a cash flow statement involves gathering relevant financial data, choosing a preparing method, and categorizing cash flows into operating, investing and financing activities. The three types of cash flow statements are the cash flow from operating activities statement, cash flow from investing activities statement, and cash flow from financing activities statement. The final result of a cash flow statement is the net change in cash for the period, calculated by combining cash flows from operating, investing, and financing activities. The cash flow statement is one of the three core financial statements that businesses prepare, including the balance sheet and the income statement. Your cash flow statement shows how cash moves through a business, detailing cash from operating, investing, and financing activities.

The fundamental issue is that financial statement extraction requires AI trained specifically on P and L statements, balance sheets, and cash flow documents – not generic document parsing repurposed for financial data. Free cash flow isn’t listed on a company’s financial statements and must be manually calculated from other data. By including working capital, free cash flow provides an insight that is missing from the income statement.

If you buy a $140,000 retail space, you lose $140,000 cash and get a $140,000 retail space. Inventory is an asset, but it isn’t cash—we can’t spend it. That means we’ve paid $30,000 cash to get $30,000 worth of inventory. Increase in Inventory is recorded as a $30,000 growth in inventory on the balance sheet.

How Cash Flow Is Calculated

The indirect method uses accrual accounting, meaning cash is tallied based on when it is earned rather than when it is received, and cash flow is determined by balance sheets and income statements. The direct method utilizes cash accounting, requiring the calculation of each cash transaction rather than relying on balance sheets and income statements to determine cash flow. The cash flow statement (CFS), along with the income statement and balance sheet, represent the three core financial statements. The cash flow statement is one of several financial statements issued by public companies, which also include a balance sheet and an income statement.

Understanding Adjustments and Non-Cash Transactions is crucial when preparing a cash flow statement. Conversely, a negative cash flow might imply that the company is investing heavily in its future growth, although it could also raise concerns about the company’s current liquidity. A positive cash flow indicates that a company is selling more than it’s buying, which could suggest a period of consolidation or profit-taking. It adjusts net income for non-cash transactions and changes in working capital, offering a clear view of the cash impact of a company’s sales and expenses. By following these steps, you can compile a comprehensive view of your company’s cash flows. Gathering financial data for cash flow analysis is a critical step in understanding the financial health of a business.

The spreadsheet contains two worksheets for year-to-year and month-to-month cash flow analysis or cash flow projections. If you don’t want to separate the “cash receipts from” and the “cash paid for” then you can just delete the rows containing those labels and reorder the cash flow item descriptions as needed. This is important because cash flow is about timing – making sure you have money on hand when you need it to pay expenses, buy inventory and other assets, and pay your employees. The direct QuickBooks Online and Xero API integration means extracted cash flow data maps automatically to your chart of accounts, not to a generic spreadsheet you still have to clean up.