IAS 7 cash flow statement: how to read the report that explains where your money went

An IAS 7 cash flow statement answers a question your profit and loss account never can: where did the money actually go? You can make a healthy profit and still struggle to pay suppliers, because profit counts sales you have not yet been paid for and ignores cash spent on equipment and loan repayments. The statement bridges that gap: it starts with your opening bank balance, sorts every cash movement into three sections, and lands on your closing balance.

IAS 7 cash flow statement: the three sections

Operating activities are the cash effects of running the business day to day — your principal revenue-producing activities, plus anything that is not investing or financing. Cash received from customers, cash paid to suppliers and employees, rent, utilities, insurance, and income taxes paid all live here. For a healthy business, this section should usually be positive.

Investing activities cover buying and selling long-term assets and investments that are not cash equivalents. Buying a delivery van, a machine, or a new office fit-out is an investing outflow; selling an old vehicle is an investing inflow. A six-month fixed deposit is an investing outflow when you make it, because it had a maturity of more than three months when you bought it.

Financing activities change the size and make-up of your equity and borrowings. Drawing down a bank loan is a financing inflow; repaying the principal is a financing outflow. Issuing shares brings cash in; paying dividends sends cash out. This section tells you how the business is funded — by its own trading, by owners, or by lenders.

IAS 7 cash flow statement: direct vs indirect method

Operating cash flow can be presented in two ways, and IAS 7 allows either. The direct method lists the actual cash receipts and payments: cash collected from customers, cash paid to suppliers, cash paid to employees. IAS 7 encourages it because it gives information that is useful for estimating future cash flows.

The indirect method is the one you will see most often. It starts with profit and works backwards: add back non-cash expenses such as depreciation, remove gains on asset sales, then adjust for changes in working capital — receivables, payables, and inventory. Both methods arrive at the same operating cash flow total; they just take different routes.

The tricky items: interest, dividends, and leases

Interest and dividends. Under IAS 7 as it stands today, businesses have a policy choice: interest and dividends paid can be shown as operating or financing, and interest and dividends received as operating or investing — applied consistently from year to year. That choice is going away. For annual periods beginning on or after 1 January 2027, the amendments made by IFRS 18 remove it for most ordinary trading businesses: interest paid and dividends paid go to financing, while interest received and dividends received go to investing. If you compare two companies' operating cash flow, check their classification policy first.

Lease payments. Under IFRS 16 Leases, the principal part of each lease payment is a financing cash flow, while the interest part usually stays in operating activities. That reclassification makes operating cash flow look stronger than it did when the whole rent payment sat in operating — the total cash out is identical, only the bucket changes.

Income taxes. Tax paid is normally an operating cash flow, unless it can be specifically identified with an investing or financing transaction.

Non-cash transactions. Some investing and financing deals involve no cash at all — converting a loan into shares, or acquiring equipment in exchange for a note to the seller. These stay out of the statement entirely and are disclosed separately.

Reading the three sections together

The signs of the three totals tell a story about where a business is in its life. Operating positive, investing negative, financing negative is the classic picture of an established business: trading generates cash, which funds new equipment and repays debt or pays dividends. Operating negative, investing negative, financing positive is typical of a young business spending on assets and funded by owners or lenders.

Two comparisons are worth making every year. First, compare capital expenditure in investing with depreciation over a few years: spending consistently below depreciation can mean assets are wearing out without being replaced. Second, check whether operating cash flow covers investing outflows — a business that funds its own investment from trading cash is in a very different position from one that needs a new loan every year to replace its equipment.

Why this matters for a small business

You do not need to prepare a full IAS 7 cash flow statement by hand to benefit from it. The discipline is the point: separate the cash your trading generates from the cash you spend on assets and the cash you raise or repay. When a month feels tight despite good sales, look at the three buckets. If operating cash is strong but the bank is empty, the money went into assets or loan repayments — a very different problem from a business that is not collecting what it is owed.

Point builds your cash flow picture from the ledger itself, so each transaction is classified by the accounts it posts to rather than re-sorted by hand at year end. If you would like to see it on your own books, join the waitlist at tetramlabs.com — the 14-day free trial needs no credit card, and the standard plan is $9.99 a month for up to 5 users.