A cash flow statement shows exactly how cash moved in and out of your business over a period. It is divided into operating, investing and financing activities and follows the UK GAAP format required by many investors and lenders.
Preparing one helps founders demonstrate financial control, liquidity and realistic growth plans. This guide walks through the practical steps with examples relevant to early-stage UK e-commerce and startup businesses.
Why Investors and Lenders Want a Cash Flow Statement
Investors and lenders use the cash flow statement to understand whether your business generates enough cash from its core activities to sustain operations. Unlike the profit and loss account, which includes non-cash items such as depreciation, the cash flow statement focuses on actual cash movements.
For early-stage founders, it demonstrates that you can manage working capital, time major purchases and plan funding rounds without running out of cash. Banks often require it alongside forecasts when assessing loan applications. The statement also highlights whether growth is funded by operations, loans, equity or asset sales.
Understanding the Three Sections in UK GAAP Format
UK GAAP requires the cash flow statement to be presented in three distinct sections:
- Operating activities – cash generated or used by day-to-day trading
- Investing activities – cash used to buy or received from selling long-term assets
- Financing activities – cash from owners, loans, repayments and dividends
The total of the three sections equals the net increase or decrease in cash and cash equivalents. A reconciliation of opening and closing bank balances must also be shown. Start with the operating section using either the direct or indirect method; most small UK companies use the indirect method.
Step-by-Step Preparation Using the Indirect Method
Begin with net profit or loss from your profit and loss account. Adjust for non-cash items and changes in working capital. Follow these practical steps:
- Take the net profit or loss figure.
- Add back non-cash expenses such as depreciation and amortisation.
- Adjust for any gains or losses on sale of assets (remove gains, add losses).
- Calculate changes in working capital: increase in stock or debtors reduces cash; increase in creditors increases cash.
- The result is net cash from operating activities.
Record investing cash flows next: purchases of equipment, software, website development or vehicles are shown as negative figures. Proceeds from selling assets are positive.
Finally record financing: cash received from share issues or new loans is positive; repayments of loans or leases are negative. Include any owner drawings if you operate as a sole trader or partnership.
Practical Example for an E-commerce Startup
Consider a typical early-stage online retailer. Net profit for the year is £18,000. Add back depreciation of £4,200 on warehouse equipment. Debtors increased by £6,500 (cash tied up), stock increased by £9,800, and trade creditors rose by £3,400.
Operating cash flow calculation: £18,000 + £4,200 – £6,500 – £9,800 + £3,400 = £9,300 net cash from operations.
Investing activities: the business bought new packaging machinery for £7,500 and upgraded its website platform for £2,200. No asset sales. Total investing cash outflow: £9,700.
Financing activities: the founder injected £15,000 of new capital and the company drew down a £10,000 start-up loan but repaid £2,000 of capital during the year. Net financing inflow: £23,000.
Net increase in cash: £9,300 – £9,700 + £23,000 = £22,600. This is then added to the opening cash balance to reconcile to the year-end bank figure.
Common Adjustments and Pitfalls to Avoid
Watch for these frequent issues when preparing your statement. VAT is usually excluded from the cash flow statement because it is not part of operating profit; only the net VAT paid to or received from HMRC appears. Owner drawings in sole trader businesses reduce financing cash flow.
Separate bank accounts for personal and business use make preparation easier. Do not mix personal expenses with business ones. Reconcile every figure to your bank statements rather than relying solely on accounting software reports. Check that the net cash movement exactly matches the change in your bank and cash balances.
If you receive grants or crowdfunding, decide whether they belong in financing or operating activities depending on their purpose. Loans from directors are usually shown under financing.
Tools and Templates for UK Founders
Use accounting software that generates cash flow statements automatically, but always review the classifications. Spreadsheet templates based on the UK GAAP format are available from various business support websites. Keep a separate cash flow forecast alongside the historical statement; investors often request both.
Record every bank transaction with clear descriptions from the start of the year. Monthly bank reconciliations reduce errors at year end. If your business is VAT registered, keep VAT control accounts up to date so you can isolate the cash paid to HMRC.
Review the statement each quarter even if you only file statutory accounts annually. This helps you spot negative operating cash flow early and take corrective action before seeking investment or loans.
Using the Cash Flow Statement in Funding Conversations
When presenting to investors or lenders, explain the key messages behind the numbers. If operating cash flow is positive but small, show how it will improve with scale. If it is negative, demonstrate that this is due to deliberate stock build or customer acquisition and that the trend is improving.
Link the cash flow statement to your business plan. Show how much runway the current cash balance gives you and what milestones you will reach before needing further funding. Lenders will focus on your ability to service debt from operating cash flow. Keep supporting workings so you can answer detailed questions about any large movements.
Loomworks in West Yorkshire provides selected early-stage founders with free desks and mentoring that can help refine these financial documents before you approach investors.
Frequently asked questions
What is the difference between a cash flow statement and a profit and loss account?
The profit and loss account shows revenue and expenses on an accruals basis, including non-cash items. The cash flow statement shows only actual cash movements in and out of the business during the period. Both are needed to give a complete financial picture.
Should I use the direct or indirect method for operating activities?
Most small UK businesses use the indirect method because it starts from net profit, which is already available, and makes adjustments. The direct method lists cash receipts from customers and cash payments to suppliers but requires more detailed records.
Do I need to prepare a cash flow statement if my turnover is below the audit threshold?
Micro-entity accounts have reduced requirements but many investors and all banks still ask for a cash flow statement. Preparing one voluntarily demonstrates good financial management even when not strictly required by law. Check current Companies House rules for your company type.
How often should I update my cash flow statement?
Update it at least every quarter and always before any funding round or loan application. Monthly updates are ideal for fast-growing e-commerce businesses where stock levels and advertising spend can change quickly.
Can accounting software produce an accurate UK GAAP cash flow statement?
Most popular packages can generate the statement but you must check that every transaction is coded to the correct category. Always reconcile the final cash figure to your bank statements and adjust any misclassified items manually.
Related reading: Can my startup claim the employment allowance on National Insurance?, How to read and understand your profit and loss report, How does VAT on low value imported goods work after Brexit?. Browse all tax & finance guides or apply to Loomworks.