FAQ: Cash Flow Report
Quick answers to common questions about the Cash Flow report.
Q: What is the difference between operating cash flow and net income?
A: Net income is an accounting measure that includes non-cash items like depreciation and accruals. Operating cash flow is the actual cash you received or paid out during operations. A business can be profitable (positive net income) but have negative operating cash flow if customers are slow to pay or if you have invested heavily in inventory.
Q: Why is my Cash Flow report negative overall when my business is profitable?
A: This often happens when the business is investing heavily in growth (negative investing cash flow) or paying down debt (negative financing cash flow). It can also happen if you are building inventory or if customers are paying slowly while you are paying suppliers quickly.
Q: Should I use the Direct Method or Indirect Method for Cash Flow?
A: The Indirect Method is more common and easier to prepare because it starts with net income and makes adjustments. The Direct Method lists actual cash receipts and payments and is more detailed but requires more work. Choose based on your preference and what your lenders or investors require.
Q: How do I interpret a negative operating cash flow?
A: A negative operating cash flow means your business paid out more cash in operations than it received. This is concerning if it persists over multiple periods, as it suggests the business is not generating cash from its core operations. Investigate the causes: slow customer payments, excess inventory, or high operating expenses.
Q: What is "free cash flow" and is it shown in the Cash Flow report?
A: Free cash flow = operating cash flow minus capital expenditures (investing cash flow). It is the cash available after maintaining or expanding your asset base. Some Cash Flow reports show this calculation at the bottom; if not, you can calculate it yourself by subtracting investing cash flow from operating cash flow.
Q: Why is depreciation added back in the Indirect Method Cash Flow?
A: Because depreciation is a non-cash expense. It reduces net income on the income statement, but no cash actually left your bank account. In the Cash Flow report, depreciation is added back to show the true cash impact of operations.
Q: Can I compare Cash Flow reports across different periods?
A: Yes. Running Cash Flow for the same period in different years (e.g., January 2025 vs. January 2026) lets you see trends in your cash-generation ability. Running it for rolling periods (e.g., each month of the year) shows seasonality in your cash flow.
Q: What if my investing cash flow is positive?
A: A positive investing cash flow means you sold more assets than you purchased. This can be normal if you are downsizing, but sustained positive investing cash flow usually means the business is not reinvesting in growth, which may not be healthy long-term.
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