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A cash flow statement shows where cash came from and where it went during a period, sorted into operating, investing and financing activities. It answers a question the income statement can’t: why the bank balance doesn’t match the profit.
If you only build one statement a lender will ask about, build this one. A business can report a profit and still miss payroll.
Do you have to prepare a cash flow statement?
A corporation governed by the Canada Business Corporations Act does. The regulations list four statements that annual financials must include at least, and one of them is a statement of cash flows (an older name, statement of changes in financial position, is accepted too). The names don’t have to match the regulation as long as the content does.
A sole proprietor or a very small shop has no federal rule of this kind. Still, a bank reading your loan application will likely want to see one, and it’s the clearest view of whether you can cover next month’s bills.
Provincial corporations follow their own corporate statute, so look at yours before you assume the same four statements apply.
What are the three sections?
| Section | What goes in | Example |
|---|---|---|
| Operating | Cash from running the business | Customer payments, supplier and wage payments |
| Investing | Cash spent on or received from long-term assets | Buying equipment, selling a vehicle |
| Financing | Cash from lenders and owners | New loans, loan principal repaid, shares issued |
Those three groups come from the private enterprise accounting standard, which also says operating cash flows can be shown by the direct or the indirect method. Wikipedia’s cash flow statement page describes the same three activities and two methods. How the standard treats an individual item, interest in particular, is a detail for your accountant, so where a line is unclear, read the section itself.
Direct or indirect, which should you use?
The direct method lists cash received from customers and cash paid to suppliers and staff. It’s easy to read and hard to build, because most accounting software doesn’t track cash that way.
The indirect method starts from net income and corrects it for things that didn’t touch cash. That’s the usual choice, and it’s where the gap between profit and bank balance becomes visible. The main corrections are depreciation, which is an expense with no cash leaving, and changes in what customers owe you or you owe suppliers.
What does a cash flow statement example look like with real numbers?
A business earns $40,000 of net income. Its customers owe it $12,000 more than last year, so that part of the profit hasn’t arrived. Operating cash flow is $28,000.
It then pays $10,000 cash for equipment, which is investing. And it’s repaying a van loan. On the car loan calculator, a $32,000 van in Ontario with $3,000 down at 7.49% over six years means a $33,160 loan and $573.18 a month. Our own run of those payments shows about $4,549 of the first twelve being principal and $2,330 being interest. Principal repaid is a financing outflow, so financing shows minus $4,549.
Add them up: $28,000 minus $10,000 minus $4,549 is $13,451 more cash than at the start of the year. The profit was $40,000 and the cash gain was a third of that.
That shape is typical of a growing business, and it’s why slow-paying customers hurt more than a weak month. The line of credit calculator is useful here. On its default figures the interest alone runs $140.83 a month, and the gap you finance while waiting for payment costs real money.
How can you improve your cash flow?
Once you can see the gap, you can shrink it. Invoice the day the work is done, not at month end. Ask for a deposit on bigger jobs. Follow up on anything unpaid after the due date, politely and early. Each of those pulls cash forward without a single new sale.
Take Dev, who runs a small renovation firm in Winnipeg. If his customers pay in 45 days instead of 15, he’s financing a month and a half of every job out of his own pocket. A few bucks of interest on a line of credit is the small cost. The bigger one is the week he can’t pay a supplier on time.
What mistakes distort a cash flow statement?
The most common is counting the whole purchase of an asset as cash out when a lender paid most of it. A van bought with a loan has only the down payment as a cash outflow at the time, and the loan itself never passes through your bank as cash from you. Ask your accountant how the standard wants that shown. Another is forgetting that the HST you collected and haven’t remitted is sitting in your bank account without being yours.
The statement also has to reconcile. Opening cash plus the net change has to equal closing cash on the balance sheet. If it doesn’t, don’t plug a number. Find the transfer between accounts or the payment you entered twice.
For a quick read on whether an equipment purchase earned its cost, try the ROI calculator. It ignores taxes and fees, as it says itself.
The sources behind this page
The list of required statements is from the Canada Business Corporations Regulations, 2001, on the Justice Laws website. The three sections and the direct and indirect methods are from Section 1540 of Part II of the CPA Canada Handbook, read through a public summary because the handbook itself is paid content. The loan and tax figures come from our calculators on 2026 rules, and the example business is invented for illustration.
Frequently asked questions
What are the three parts of a cash flow statement?
Operating, investing and financing activities. Operating is day-to-day cash, investing is long-term assets, and financing is loans and owner money.
What is the difference between the direct and indirect method?
The direct method lists cash received and paid. The indirect method starts from net income and adjusts for items that didn't move cash.
Does a Canadian corporation have to prepare one?
Under the CBCA regulations, annual financial statements must include a statement of cash flows or a statement of changes in financial position.
Why is my cash lower than my profit?
Customers may not have paid yet, and you may have bought equipment or repaid loan principal. None of those reduce profit the same way.
Does the statement have to match the balance sheet?
Yes. Opening cash plus the net change must equal the closing cash on the balance sheet.
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