Cash flow statement explained: why profit isn't cash.

"The P&L says I made $60,000. Why is there only $35,000 in the bank?" It's one of the most common questions owners ask, and the answer is always in the same report. With the cash flow statement explained properly, you can trace every dollar between profit and the bank balance, and stop being surprised by it.

This guide covers the three sections, walks through a full example for a hypothetical Edmonton contractor, and shows the mistakes that make the report useless. It's the third report in the set, after the profit and loss and the balance sheet.

1The three sections of a cash flow statement

• Operating activities: cash from running the business. Customer payments in, supplier, wage, rent and tax payments out.
• Investing activities: cash spent on or received from long-term assets. Buying a truck, tools or computers; selling old equipment.
• Financing activities: cash between the business and its lenders or owners. Loan proceeds, loan principal repayments, owner contributions, dividends or draws.

Add the three together and you get the net change in cash for the period. Add that to your opening cash and you get your closing cash, which should match your reconciled bank balance.

2Cash flow statement explained with a worked example

Say you run an incorporated finishing carpentry company that works across Edmonton, Leduc and Beaumont. The numbers below are hypothetical. Over the year:

• Net income on the P&L was $60,000.
• Amortization on tools and the truck was $5,000 (an expense, but no cash left the bank for it).
• Accounts receivable went up by $8,000 (customers owe you more than they did at the start of the year).
• Accounts payable went up by $3,000 (you owe suppliers more than you did).
• GST payable went up by $1,000 (collected but not yet remitted).
• You bought a new truck for $40,000, financed with a $30,000 loan.
• You repaid $6,000 of loan principal.
• The corporation paid you $25,000 in dividends.
• Cash at the start of the year was $15,000.

There's the answer to "where did my $60,000 go?" The business generated $61,000 from operations, spent a net $10,000 of its own money on the truck (the loan covered the rest), paid down $6,000 of debt and paid you $25,000. The bank went from $15,000 to $35,000.

Why the adjustments go the way they do

• Amortization is added back because it reduced profit without any cash leaving.
• A rise in receivables is subtracted because you recorded the sale as income but haven't collected the cash.
• A rise in payables is added because you recorded the expense but haven't paid it yet.
• A rise in GST payable is added because you're holding CRA's money. It'll leave when you file.

That last one deserves attention. A growing GST payable flatters your cash balance. If you file annually, the bill can be large, which is why many owners keep a separate account for GST. Our post on GST filing deadlines in Alberta covers the dates.

3Reading the three sections together

The signs of the three totals (positive or negative) tell a quick story about where a business is. These are general patterns, not rules:

The example business sits in the first row: strong operating cash, a planned equipment purchase and money returned to the owner. A new business in its first year often sits in the third row, and that's fine as long as it's moving toward the first.

The single most useful comparison is operating cash vs net income. Over time, they should be roughly similar. If net income is consistently much higher than operating cash, profit is getting stuck somewhere, usually in unpaid invoices or inventory.

4The truck purchase as a journal entry

Here's how the truck landed on the books (GST left out to keep it simple):

On the cash flow statement, the full $40,000 shows under investing and the $30,000 loan shows under financing, so the net $10,000 that actually left the bank is explained. None of it touches net income. For tax, the truck is claimed through capital cost allowance over several years.

5Common mistakes that wreck the cash flow statement

QuickBooks Online builds the cash flow statement from your balance sheet changes. If the balance sheet is wrong, the cash flow statement is wrong in exactly the same way.

• Loan payments coded entirely to expense. The principal should reduce the loan, which shows under financing. Coding it to expense shrinks net income and hides debt repayment.
• Equipment expensed. A $40,000 truck coded to "repairs" makes operating cash look awful and investing look like zero.
• Owner draws mixed into expenses. Dividends or draws belong in financing, not operating.
• Unreconciled bank accounts. If the ending cash doesn't match the bank statement, the whole report is off.
• Transfers between accounts miscoded. Moving money from savings to chequing shouldn't change anything; coded as income, it inflates operating cash.
• Credit cards treated as cash. Make sure card accounts are set up as credit card liabilities, so the report treats them correctly.

6Finding it in QuickBooks Online

In QuickBooks Online, go to Reports and search for Statement of Cash Flows. It uses the indirect method, starting from net income just like the example above. Useful tips:

• Run it for a period that ends on a reconciled month-end.
• Check the bottom line, "cash at end of period", against your bank statements.
• Click into the adjustments. A large "increase in accounts receivable" points to slow-paying customers; a large unexplained line usually points to a coding error.
• Make sure each account's type in the chart of accounts is right. QuickBooks decides which section a line falls in based on account type.

7Where it fits for Canadian businesses

For a small Canadian corporation, the T2 return uses balance sheet and income statement information; a cash flow statement isn't part of the GIFI schedules, and many small private companies don't include one in their year-end compiled statements. Sole proprietors report on the T2125, which doesn't ask for one either.

So why bother? Because lenders often ask for one, and because it's the report that explains your cash in plain terms. If you're applying for equipment financing or a line of credit in Edmonton, being able to explain your operating cash flow helps.

8Use it every quarter

If your profit and your bank balance never seem to agree, Plum can untangle it. We do monthly books, reconciliations and clear reports for owners in Edmonton, Spruce Grove, Leduc and Beaumont. Book a call and bring your questions.

9Questions people ask

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This article is general information for Alberta businesses and isn't tax or legal advice. Rules and thresholds change, so confirm your situation with your accountant or CRA.