Welcome to part five in this series. 

In this fifth part of the series, we will be focused on the cashflow statement and we'll be covering the following three areas. First, what is the purpose of a cashflow statement and what does it show? Second, we'll examine the key components of the cashflow statement. Finally, we'll consider some things a director should consider when reviewing a cashflow statement. 

We'll be referring to an example cashflow statement for a fictitious company, Creative Arts Limited, and you can download a copy from the link in the video description. It will be helpful for you to have a copy of it available as we go through this session. 

To begin, what is a cashflow statement and what does it show? A cashflow statement, sometimes called a statement of cash flows, shows the inflows and outflows of cash during a period. For example, the financial year, it shows where the cash came from and how it was spent. It plays a critical role in helping directors to understand whether their organisation can generate enough cash to fund its activities and stay solvent. 

All of the cash inflows and outflows during the period are grouped into three categories. Cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. 

First group is cash flows from operating activities. This includes all of the cash inflows and outflows relating to the day-to-day running of the organisation. In the arts and cultural sector, typical operating cash inflows would include ticket sales, donations, corporate sponsorships, government grants, and interest income. Typical operating outflows would include wage payments to employees and artists, payments to suppliers for organisational expenses such as marketing, venue, hire, travel, and insurances. 

The total of all of these operating inflows and outflows gives the net cashflow provided by operating activities. Referring to Creative Arts Limited's cashflow statement, the net cashflow provided by operating activities is $156,600. 

The net cashflow provided by operating activities is one of the most important pieces of information in the financial statements. It effectively represents the net cash surplus or deficit the organisation has achieved for the year from its core operations. 

You may then ask if the net cash flow provided by operating activities represents the net cash surplus or deficit, why isn't it the same number as the net surplus or deficit in the income statement? There are two reasons. Firstly, timing. The income statement recognises income and expenses on an accruals basis. That is when they are earned or incurred in accordance with accounting standards. 

On the other hand, income and expenses are recognised in the cash flow statement on a cash basis. That is when the cash is received or paid. For example, let's assume Creative Arts Limited has programmes printed and delivered on 29 June. The printer provides their invoice with the delivery and is paid by the company's finance team two weeks later. 

In this example, the expense will be recorded in June in the income statement and in July in the cashflow statement. As Creative Arts Limited has a 30 June end of financial year, it would mean that the printing expense would be recorded in the income statement in one year and recorded in the following year in the cashflow statement. 

The second reason for the difference is non-cash expenses. The income statement will include certain expenses such as depreciation, that a non-cash expense and therefore will never appear in the cash flow statement. As the income statement includes non-cash expenses and the cash flow statement doesn't, the net cash flow provided by operating activities in the cash flow statement is typically higher than the net surplus in the income statement. 

This is a useful health check for directors to consider. For example, in Creative Arts Limited, net cash provided by operating activities of $156,600 is higher than the net surplus of $28,800. 

The second group of cash flows is cash flows from investing activities. This shows cash outflows or inflows from buying or selling non-current assets such as property, plant and equipment or financial investments. A reminder that non-current assets are assets expected to last longer than 12 months. 

Referring to Creative Arts Limited's cash flow statement, the net cash used in investing activities is negative $275,100. A negative number indicates that there is a net cash outflow. This means the organisation is investing in non-current assets. If the number was positive, it would mean that the company is selling non-current assets. 

The third group is cash flows from financing activities. Cash flows in this section relate to how the organisation is funded and may include contributions of capital from members or shareholders or loans received or repaid or lease payments made. Referring to the Creative Arts Limited's Cash Flow statement, the net cash used in financing activities is negative $27,300 and represents amounts paid for lease. 

If you add together the net cash flows from operating activities, investing activities, and financing activities, you get the total increase or decrease in cash during the period. Referring to the Creative Arts Limited's cash flow statement, the sum of the three cash flow categories is negative $145,800, and this is shown on the line net change in cash and cash equivalences. 

If you add the net change in cash figure to the cash balance at the beginning of the period, you arrive at the cash balance at the end of the period. For Creative Arts Limited, the cash balance at the beginning of the year is $344,000. Adding the net change in cash to this gives the cash balance at the end of the year of $198,200. 

Creative Arts Limited's balance sheet shows two columns. The first column shows the balances as at 30 June, 2025, and the second column shows the balances as at 30 June, 2024. These are the balances at the end of the previous financial year. 

The balance sheet shows in the current asset section that the balance of cash and cash equivalence at the end of 2024 year is $344,000. It further shows that the balance of cash and cash equivalences at the end of the 2025 year is $198,200. These same two numbers appear on the last line of the cashflow statement. 

Put another way. The statement of cashflow explains how we got from last year's cash balance to this year's cash balance. 

The cashflow statement we have been reviewing is a look back analysis of the cash flows that have happened during the period. Your management accounts should also contain a look forward view of cash by preparing a cashflow forecast. 

A cashflow forecast is an essential tool for the directors and management to consider the ability of their organisation to stay solvent. That is the organisation can pay its obligations as and when they are due for payment. We will talk more about cashflow forecasting in later parts in this series. 

To summarise the key learnings from this part of the series. First, a cashflow statement shows the inflows and outflows of cash in an organisation during a period. It shows where the cash came from and how it was spent, and plays a critical role in helping directors to understand whether their organisation can generate enough cash to fund its activities and stay solvent. 

Second, all of the cash inflows and outflows are grouped in one of three categories. Cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Cash from operating activities are all the flows relating to the day-to-day activities of the organisation. The net of all operating cash flows is a net cash surplus or deficit for the period. Cash flows from investing activities shows cash used or received from buying or selling non-current assets, such as property. Cash flow from financing activities, shows cash flows relating to the funding of the organisation. 

Finally, we discuss some of the things directors should consider when reviewing a cash flow statement. Part six of this series will further explore how directors can read and interpret the cash flow statement and what additional questions they should ask.