Advantages of a Cash Flow Statement: Your Guide to Red Flags

In business, staying on top of your company’s financial position is essential for both success and legal compliance. Whether you’re managing inventory, monitoring employee changes, or tracking cash flow, understanding where your money is going can mean the difference between weathering difficult periods and facing serious financial trouble.

For company directors, cash flow statements serve a dual purpose: they help plan for growth and manage operations, but they also reveal warning signs that legally require action. Understanding the advantages of a cash flow statement isn’t just about business optimisation. It’s about knowing when your company’s financial position requires professional intervention.

There are a number of notable advantages of a cash flow statement that can help your business perform optimally while alerting you to potential problems before they become critical. This guide will explain what the main advantages of a cash flow statement are, what they’re used for, what’s included, and crucially, the warning signs directors must act upon.

First published October 2022. Last updated January 2026.

What is a Cash Flow Statement Used For?

A cash flow statement is a tool used for managing your finances by tracking the cash flow in and out of your business. It helps organisations manage their money better and makes it easier to accurately determine where vital resources should be distributed.

Cash flow statements should be a vital part of your company’s financial plan, — as it’s a crucial step in determining the overall performance and viability of your business. It can also be useful for short-term planning, thanks to its use in making cash forecasts.

Your cash flow statement will show the sources of your cash and allow you to better monitor the incomings/outgoings of your money. This information can then be utilised to make more effective decisions regarding operations.

For Directors: Legal Obligations and Cash Flow Monitoring

For directors specifically, cash flow statements serve a critical legal function beyond business planning. They help you monitor whether your company can pay its debts as they fall due — the fundamental test of solvency under UK insolvency law.

Once a director knows (or should have known) that the company cannot meet its obligations as they fall due, wrongful trading provisions apply. This means:

You have a duty to minimise losses to creditors.
Personal liability can be attached if you continue trading inappropriately.
You must consider formal insolvency procedures (CVL, Administration, etc.).
Early identification gives you more options and better protection.

Regular cash flow monitoring isn’t just good business practice for directors — it’s a legal requirement. The cash flow statement is your primary tool for meeting this obligation.

For more information about why having a cash flow plan is important, please check out our blog on the subject.

What is Included in a Cash Flow Statement?

When formatting your cash flow statement, generally there will be three different sections: operating activities that generate revenue for your business, investment activities including all losses and profits made on investments, and financing activities, which cover transactions surrounding debt, equity, dividends, etc.

Let’s take a look at the three vital sections included in a cash flow statement in more detail:

1) Operating Activities

Operating activities are any business activities designed to either generate additional revenue or record money spent when producing a product/service. Examples of operating activities include:

Manufacturing
Distribution
Marketing
Interest payments
Wages
Rent payments

Your operating activities should include a record of your company’s net earnings. This can be used to give an estimate of your profitability and viability at the present time.

Director’s Note: If your operating activities consistently show negative cash flow, your core business model isn’t generating sufficient cash to sustain operations — regardless of what your profit and loss statement shows. This is one of the earliest warning signs that requires investigation.

2) Investment Activities

The secondary section of your cash flow statement should include records of all profits and losses your business has sustained as a direct result of investment into assets.

The investment activities section should also make clear reference to your business’s capital expenditure. These investments are vital in business, as they finance fixed assets for the future of the company, such as buildings, land, or company vehicles. Clear evidence of your business heavily funding capital expenditure will show that you are putting money into future operations. While this is a positive thing, it will lead to a short term decrease in company cash flow.

Director’s Note: Large negative investment activities are normal for growth. However, if you’re making significant capital investments while operating activities show negative cash flow, you may be depleting cash reserves faster than is sustainable.

3) Financing Activities

The final core section of your cash flow statement should be focused on the extent of cash flow that is dedicated to paying or receiving any debt or equity. Financing activities would include issuing/paying down company debt, paying cash dividends, or issuing/selling stock.

In these types of transactions, incoming cash is recorded whenever capital is raised, and any outgoing cash is recorded when the dividends are paid.

Director’s Note: If financing activities show increasing inflows period-over-period, you’re borrowing more to cover operations. This isn’t growth funding, it’s survival funding. When lending stops, operations stop.

How to Use a Cash Flow Statement

A cash flow statement is used to document the total financial activity and health of your business. It can be utilised to help you better plan your firm’s immediate future, as it provides a more accurate representation of current cash surpluses/deficits.

Regardless of how much belief you have in your business, if you are consistently struggling to maintain a healthy cash flow, it is important to understand why. Having a clearer picture of your company’s current cash flow forecasts can allow you to make informed decisions with regards to outgoings.

Utilising this form of financial management, you are able to understand more clearly whether your business is operating with a positive or negative cash flow, and you can tweak operations accordingly.

A cash flow statement is also useful to have in the event of any potential investment into your company. Investors can use the statement to determine how viable your company is before taking action.

Recognising Warning Signs in Your Cash Flow Statement

While cash flow statements help healthy businesses plan ahead, they also reveal critical warning signs that directors of less healthy companies might not otherwise see (until it’s too late). Understanding these warning signs is one of the key advantages of a cash flow statement, as it allows early intervention while recovery options still exist.

If your cash flow statement shows any of the following patterns, you need to assess whether professional advice is required:

Warning Sign 1: Negative Operating Cash Flow

What it looks like: Your operating activities section shows negative cash flow for 2+ consecutive periods, despite your P&L showing profit.

What it means: Your core business isn’t generating enough cash to sustain itself. Common causes of this include:

Extending too much credit to customers (receivables growing faster than sales).
Carrying too much inventory (cash tied up in stock).
Operating with unsustainable cost structures.
Customers are paying at a slower rate than you’re paying suppliers.

Director action required: If operating cash flow is negative for 3+ months without a clear reversal plan, this indicates a structural problem. You should:

Project cash flow for next 6 months.
Identify if the gap is closeable with available resources.
Consider whether the business model is viable.
Seek professional advice if unclear.

This is often the 6-12 month warning before insolvency becomes unavoidable.

Example: A professional services firm shows £180k annual profit but operating cash flow is negative £15k monthly. Investigation reveals £280k in receivables (customers paying in 90 days) while owing £195k to suppliers (demanding 30 days). Six months later, the company can’t make payroll despite a ‘profitable’ year.

Warning Sign 2: Declining Cash Reserves Quarter-on-Quarter

What it looks like: Each period’s closing cash balance is lower than that of the previous period, creating a downward trend over multiple quarters.

What it means: Even if you’re still trading and paying suppliers on time, you’re depleting reserves. The business is consuming more cash than it generates. Eventually, the reserve hits zero and the crisis begins.

Director action required: Project when reserves will be exhausted at current burn rate. If it’s within six months, you need to:

Identify what’s causing the decline (operating losses, investment, debt repayment, etc.).
Determine if it’s reversible with available resources.
Consider whether additional funding is available and appropriate.
Assess whether the business is viable or if formal insolvency procedures should be considered.

If reserves will exhaust within three months and you cannot identify a funded turnaround plan, you should speak to a licensed insolvency practitioner about options, including Creditors’ Voluntary Liquidation, Administration, or Company Voluntary Arrangement. Early advice protects you from wrongful trading liability.

Example: An e-commerce retailer has strong Christmas trading (£140k positive cash flow Nov-Dec) but uses it to pay down stock borrowing. January-February shows £50k monthly negative operating cash flow. March arrives with £8k in bank and £78k owed to spring stock suppliers. Business enters CVL despite a ‘successful Christmas.’

Warning Sign 3: Increasing Financing Inflows

What it looks like: Your financing activities section shows you’re borrowing more each period, and the borrowing is being used to cover operating expenses (not growth investments).

What it means: You’re using debt to survive rather than to grow. This is not sustainable. When the borrowing capacity runs out or lenders withdraw facilities, operations cease immediately.

Director action required: Ask yourself: “If I couldn’t borrow another pound, could operating cash flow cover operations?”

If the answer is NO, you’re technically insolvent (unable to pay debts as they fall due without continuous new borrowing). This triggers director obligations to do one of the following:

Cease trading.
Seek formal insolvency advice.
Implement an immediate turnaround with confirmed viability.

Example: A manufacturing business borrows an additional £15k monthly to cover operations (not growth investments). The director believes ‘we just need to get through this rough patch.’ After eight months, they’ve borrowed £120k and operating cash flow is still negative. When the bank refuses further lending, operations cease immediately. In reality, the business was effectively insolvent months ago but borrowing masked this fact.

Warning Sign 4: Large and Growing Gap Between Profit and Cash

What it looks like: Your P&L statement shows £50k profit, but your cash flow statement shows £30k negative cash flow. The gap is widening each period.

What it means: Profit is being consumed by:

Customers not paying (receivables growing).
Inventory building up (cash tied in stock).
Capital purchases (cash out, no immediate revenue).
Tax liabilities building (VAT, PAYE, Corporation Tax due).

Director action required: Investigate ASAP. We recommend you immediately:

Run a historic debtors report (is customer credit lengthening?).
Review inventory levels (is stock moving or accumulating?).
Calculate actual tax liabilities due (not just accrued).
Project cash position after next major payment (payroll, VAT, rent, etc.).

This warning sign is particularly dangerous because directors see the tip of the iceberg in the form of “profit” and assume the business is healthy, missing the cash crisis that has formed beneath the waterline.

Example: A construction company shows positive £20k monthly operating cash flow. The director draws it all as profit. Quarterly VAT bill arrives: £95k due with £34k in bank. The ‘positive cash flow’ included £15k monthly VAT liability is not set aside. The company enters liquidation with HMRC as the primary creditor.

When to Seek Professional Advice

If you’ve identified any of the above warning signs, it’s strongly recommended that you speak to a licensed insolvency practitioner. Two or more of the above signs should be seen as a significant red flag and indicates you need to contact a specialist immediately. This isn’t about “failing”, it’s about understanding your legal obligations and available options while they still exist.

Early advice provides options that disappear once you’re in crisis:

Month One Options (warning signs appear): Restructuring, refinancing, turnaround plans possible.
Month Three Options (cash depleting): Time to Pay with HMRC possible, emergency funding options exist.
Month Six Options (crisis): Often only CVL or Administration remain.

The advantages of a cash flow statement include giving you this early warning. Acting on it protects both the business and you personally.

The Benefits of a Cash Flow Statement

Successful businesses — in order to truly be successful — need to have the sufficient amount of cash required to operate. Constructing an accurate cash flow statement will bring a series of key benefits for your business, including details around spending, more information to help you to plan in the short term, and more.

Some of the major benefits of a cash flow statement are as follows:

Appraise Performance and Identify Problems Early

A cash flow statement can be an effective way for management to evaluate the overall performance of the company, or even individual teams/sectors of the business. This can be done by comparing the cash flow statements with projections. Any significant differences in these metrics can then be investigated in order to determine where the fault lies.

The Director Advantage: Cash flow statements reveal problems before they become crises. A profitable company can be heading toward insolvency if cash flow patterns show warning signs. By comparing projected vs. actual cash flow monthly, directors can:

Identify deteriorating payment patterns from customers.
Spot cost increases before they become unmanageable.
See seasonal gaps that need advance planning.
Recognise when borrowing is financing operations not growth.

This early identification is also when the most options exist. Once you can’t make payroll, those options have disappeared.

Track Spending Information

A cash flow statement for your business will give you one of the clearest images possible of what payments your company makes to various parties. From suppliers to creditors, there is always money going out of a business.

Losing track of the outs of your company can prove devastating for its long-term health and viability if left unchecked for a prolonged period of time.

Your cash flow statement will allow you to paint a clear picture of your payments. It will also show any transactions paid in cash that will therefore not be reflected in many other forms of financial statement.

The Director Advantage: For directors, tracking spending isn’t just about efficiency, it’s about understanding your ability to pay debts as they fall due. Your cash flow statement shows:

Upcoming creditor payments due.
Payroll obligations.
HMRC tax liabilities (VAT, PAYE, Corporation Tax).
Rent, utilities, and other fixed commitments.

If projected outflows exceed projected inflows within the next three months, you cannot pay debts as they fall due. This is the legal definition of insolvency (cash flow insolvency), and triggers director obligations regardless of balance sheet position.

Maintain Healthy Cash Balance and Avoid Insolvency

An accurate and up-to-date cash flow statement will help in ensuring that your company maintains a healthy cash balance.

A successful business is an organised one. Keeping a clear eye on your balance to ensure that there is not too much or too little money in reserve is vital. Excess money in reserve would likely be better utilised to make worthwhile investments or buy vital resources, such as additional inventory. Conversely, a major shortage of money in reserve would inhibit your ability to operate.

However, keeping on track and ensuring you always have a clear idea of your company cash balance will ensure that you remain ahead of any potential situation, and can always act ahead accordingly. For example, if you were struggling with cash flow, if you are aware of the situation, you may be able to proactively seek sources to borrow vital funds needed to continue your operations.

The Director Advantage: The advantage of maintaining visibility of cash balance goes beyond operational efficiency, it’s about knowing when you’ve crossed from “business challenge” to “legal obligation to act.”

Your cash balance determines whether you’re managing normally, entering risky territory, or legally obligated to act. To help, there are three thresholds you should be aware of to indicate what position your business is in:

Threshold One = Comfortable Position: Cash reserves cover + months of operating costs. Normal business operations with capacity for unexpected challenges, can make planned investments, quarterly monitoring sufficient.
Threshold Two = Warning Position: Cash reserves less than one month of operating costs. Limited margin for error if problems arise, not yet insolvent but trajectory concerning, need detailed 3-6 month forecast immediately.
Threshold Three = Crisis Position: Cannot pay next month’s obligations. Legally insolvent (cannot pay debts as they fall due), director obligations triggered under insolvency law, continuing to trade may create personal liability issues.

Knowing which threshold describes your current cash position determines what actions are legally required. Threshold one requires normal monitoring, threshold two means you should seek professional advice about improving your position while options still exist — one delayed payment or unexpected cost could push you into crisis — and threshold three means you must contact a licensed insolvency practitioner within 48 hours, as you have legal duties to creditors and must understand your personal exposure before continuing to trade.

Improve Short-Term Planning and Scenario Analysis

Your company cash flow statement is a vital tool utilised by businesses around the world; companies of all shapes, sizes, and sectors. It will clearly state whether the companies in question currently have the sufficient funds necessary to operate optimally. This information will allow you to plan ahead for any short-term obligations on the horizon. Things like upcoming payments to a regular supplier or creditor.

With an accurate cash flow statement you will be able to analyse your history of incomings/outgoings and plan accordingly. Management can utilise a cash flow statement to make plans and co-ordinate the operation.

The Director Advantage: For directors, short-term planning with cash flow statements isn’t just about efficiency, it’s about scenario testing and understanding your options:

Short-term planning with cash flow statements allows directors to test different scenarios and understand their options before problems materialise. When forecasting your next 3-6 months, run three scenarios:

Scenario One (Best Case): All customers pay on time. No unexpected costs, sales meet projections. Result: Can meet all obligations comfortably.
Scenario Two (Realistic Case): 20% of customers pay 30 days late, one unexpected cost (equipment repair, legal fee), sales 90% of projection. Result: Can still meet obligations, but cash buffer reduced.
Scenario Three (Stressful Case) 40% of customers pay 60 days late, major unexpected cost, sales 70% of projection. Result: Cannot meet obligations next quarter.

If your stress-test scenario shows you cannot pay debts as they fall due, you need professional advice NOW, not when the stress case actually happens.

The Limitations of a Cash Flow Statement

Ultimately, the limitations of a cash flow statement boils down to the fact that cash flow is not the only metric to determine if your business is successful or not. The best use of a cash flow statement is when it’s paired with an income statement and balance sheet, the other common forms of financial statement.

A negative cash flow shown in a statement should not automatically lead to you sounding the alarm and preparing to abandon ship. In fact, in some situations, it can even be a positive. For example, it could be a sign of an ambitious company looking to expand into new locations/regions.

Your cash flow statement is much better used to analyse any trends in your funds from one period to another, to give you a gist of if an intervention is necessary.

Understanding When Negative Cash Flow Becomes Crisis

Directors need to understand the difference between strategic and crisis negative cash flow:

Strategic (Planned): Investment in growth with confirmed funding, temporary period with clear route back to positive. Example: Opening second location with £200k equity investment, forecast shows positive cash flow within 18 months.
Crisis (Structural): Operating activities consistently negative, using debt for day-to-day operations, no turnaround plan. Example: Negative £30k monthly operating cash flow, borrowing to cover payroll, receivables growing, payables aging.

The Director’s Test: Ask yourself: “If I stopped all expansion today, would operating cash flow be positive?” If NO, and you’re using new borrowing to pay old debts, you need professional advice about viability.

Confidential Advice for Directors

Effective cash flow management is vital for long-term business viability. However, there’s a critical point where cash flow difficulties stop being a management challenge and become a legal issue requiring professional intervention.

Steven Wiseglass, licensed insolvency practitioner with over 20 years experience, helps directors understand their position and legal obligations when cash flow becomes critical.

Our consultations are confidential, practical, and focused on clarity: where you stand, what your obligations are, and what options exist. This is time-sensitive professional advice, not a sales call.

For directors in crisis: Contact us directly on 0800 093 4604 or fill in our contact form and a member of the Inquesta team will be in touch as soon as possible.

Understanding the advantages of a cash flow statement isn’t just about better management — it’s about recognising when warning signs require action and seeking professional advice while options still exist.

4 Advantages of a Cash Flow Statement