In a previous post, we unpacked the income statement, which tells you whether your business made a profit. In this post we wrap up the financial literacy mini‑series with the report that confuses most SME owners even more: the cash flow statement.
And honestly, it is the most misunderstood report in small businesses across South Africa. Yet it answers the question every business owner eventually asks:
“If my business is profitable, why is there no cash in the bank?”
The cash flow statement is where that answer lives. Once you know how to read it, your financial reports will finally start making sense.
What the Cash Flow Statement Actually Shows
The cash flow statement tracks real money moving in and out of your bank account over a period. Every rand in. Every rand out. And it groups those movements by what caused them.
This is very different from the income statement, which records money when it is earned or owed, not when it actually moves. That timing difference is where most cash flow shocks come from.
Example:
You do R200 000 worth of work in March.
Your income statement shows R200 000 revenue in March.
But the client only pays you in May.
Your cash flow statement only shows the R200 000 in May.
So March looks profitable on paper, but your bank account tells a different story.
The cash flow statement connects the dots between “profit” and “actual cash”. If you only look at your income statement, you are seeing half the picture.
The Three Parts of a Cash Flow Statement
This cash flow statement is slightly different to the cash flow you did in this post. It is more in depth and covers the WHOLE business. Every cash flow statement is split into three sections. Each one tells you something different about how your business is behaving.
1. Operating Activities
This shows cash coming from your day‑to‑day business. The cash to “run your business”.
This is the most important section because it tells you whether your business model is generating cash or burning it.
Examples: money from clients, payments to suppliers, salaries, VAT paid to SARS.
2. Investing Activities
This shows money spent on long‑term things your business needs to operate.
Examples: buying a vehicle, buying equipment, selling old assets.
A negative number here is not bad. It often means you are investing in growth.
3. Financing Activities
This shows how the business is being funded. This is from “outside sources” and not from the income generated by the business.
Examples: loans received, loan repayments, owner contributions, drawings, dividends.
Net Movement in Cash
This is the total change in your cash for the period.
When added to your opening bank balance, it should match your closing bank balance. If it does not, something is wrong in your books.
The Most Important Number: Operating Cash Flow
If you only look at one number on the cash flow statement, make it this one.
A business with positive operating cash flow is healthy. It means your core business is generating more cash than it uses.
A business with negative operating cash flow is spending more cash than it brings in. You can cover this for a while with loans or owner contributions, but not forever.
The best diagnostic you can do is compare:
Operating cash flow vs net profit (from the income statement).
If profit is high but operating cash flow is low, the missing cash is usually tied up in:
- slow‑paying customers
- stock
- prepaid expenses
Fixing that gap is often the fastest way to improve your cash position.
Six Red Flags and Green Flags to Watch For
1. Operating cash flow is positive and growing
Your business is generating real cash. Strong signal.
2. Operating cash flow is negative but profit is positive
Classic cash flow problem. Usually slow debtors or fast growth eating cash. Needs attention.
3. Large negative investing cash flow
You are buying assets. Good if planned. Concerning if unexpected.
4. Financing activities always positive
You are borrowing often to keep the business running. Only sustainable if operating cash flow improves.
5. Net cash movement negative for several months
Cash is draining. This is a structural problem.
6. Net cash movement positive and growing
Cash is building up. You have room to create reserves.
How to See This in Xero
In Xero, the cash flow statement is called Statement of Cash Flows.
Go to Accounting → Reports and run it for any period.
Most South African SMEs should run this monthly alongside the income statement and balance sheet. At BC Accounting Services, we review all three every month, and the cash flow statement is usually where the most important conversations start.
If the Statement of Cash Flows does not match your bank balance, there is a bookkeeping error. Your adviser will pick this up during the monthly review.
This wraps up our financial literacy mini‑series. Next, we close Month 3 with a thought‑leadership piece on the difference between being busy and being profitable.
Want your monthly management accounts to include a cash flow statement explained in plain language?
Book a free discovery call at bcas.co.za.
If you want, I can also rewrite this into a podcast script, a shorter blog version, or a social‑media‑friendly summary.