How to Read a Cash Flow Statement and Build Your Own

Your accountant sends a profit and loss statement that says the business made money, yet the bank balance keeps shrinking and you are not sure why. The cash flow statement is the report that answers that question, and it is the one most small business owners in Malaysia never read. This guide explains its three sections in plain words, walks through a three-month example in ringgit, lists the five numbers to check each month, and shows how to build a version yourself from bank statements.

What a cash flow statement does

A profit and loss (P&L) statement records income when you earn it and costs when you incur them, whether or not money has moved. A cash flow statement records only money that actually came in or went out of the bank during the period, and sorts it into three groups: operating, investing and financing. The last line reconciles your opening bank balance to your closing bank balance.

For Malaysian private companies, the statement of cash flows is one of the components of a full set of financial statements under the Malaysian Private Entities Reporting Standard (MPERS), issued by the Malaysian Accounting Standards Board. A revised MPERS (2025) applies to financial years beginning on or after 1 January 2027, with earlier adoption allowed. The structure follows the international standard IAS 7, so a statement prepared in Kuala Lumpur reads the same way as one prepared in London or Singapore. Sole proprietors are not required to produce one, but the logic is just as useful to them.

The three sections

Operating activities

Cash from the day-to-day business: receipts from customers, payments to suppliers, salaries, EPF and SOCSO, rent, utilities, SST and income tax paid. This is the number that tells you whether the core business feeds itself. If it is negative for several periods in a row, the business is being kept alive by borrowing or by the owner’s own money.

Investing activities

Cash spent on, or received from, long-lived assets: buying a van, a commercial oven or a second outlet’s fit-out, paying for software that will be used for years, or selling old equipment. A negative figure here is normal for a growing business. The question is whether operating cash flow can afford it.

Financing activities

Cash between the business and its funders: new loans drawn, loan principal repaid, hire purchase instalments, money the owner puts in, and drawings or dividends taken out. Interest paid may be shown here or under operating activities; IAS 7 allows either, as long as you are consistent from year to year.

Direct versus indirect method, in plain words

The two methods differ only in how the operating section is presented.

• Direct method lists actual cash receipts and payments: cash from customers, cash to suppliers, cash to staff. It reads like a bank statement sorted into categories, and it is the easier one for an owner to build from scratch.
• Indirect method starts with profit from the P&L and adjusts it: add back non-cash costs such as depreciation, subtract increases in receivables and stock, add increases in payables. Most accountants prepare this version because it comes straight from the ledgers and explains why profit and cash differ.

Both arrive at the same operating cash figure. If you receive the indirect version, read the adjustments carefully; they are a diagnosis of where your cash is stuck.

A three-month worked example

Suppose Kopi Kita Sdn. Bhd. runs a café in Puchong. Its statement for July to September 2026, with illustrative figures, looks like this.

The café’s P&L for the same quarter shows a profit of RM21,000, so the owner feels successful. The cash flow statement shows the bank balance fell by RM23,500. The indirect reconciliation explains the first part of the gap:

• Start with profit of RM21,000.
• Add back RM1,500 of depreciation on the machine and RM1,000 of interest that is shown under financing: RM23,500.
• Subtract RM4,000 of catering sales invoiced to a corporate client but not yet collected: RM19,500.
• Subtract RM3,000 of extra coffee beans bought ahead of the Deepavali rush: RM16,500, which is the net cash from operating activities.

Then the espresso machine (RM18,000), the hire purchase instalments (RM10,000) and the owner’s drawings (RM12,000) turn RM16,500 of operating cash into a RM23,500 fall in the bank balance. Nothing is wrong with the café. The owner has spent next quarter’s cushion in one go, and the P&L alone would never have told her.

The five numbers to look at every month

1. Net cash from operating activities. Positive and growing is the goal. Compare it with profit; a persistent gap means receivables or stock are piling up.
2. Closing cash against your minimum buffer. Set a floor, for example two months of fixed costs. For Kopi Kita that is about RM45,000. The quarter closed at RM18,500, below the floor, which is a signal to slow spending until the balance recovers.
3. Cash collected against sales invoiced. If customers owe you more each month, you are financing them.
4. Capital spending against operating cash. Buying assets with cash the business generated is healthy; buying them with the overdraft is a decision to be made deliberately, not by accident.
5. Owner’s drawings plus loan repayments against operating cash. If these two together exceed operating cash flow, the business is shrinking even if sales are rising.

How it differs from the P&L and from a 13-week forecast

The P&L measures performance: did we earn more than we spent, matched to the period. The cash flow statement measures liquidity: did money arrive before it had to leave. A business can be profitable and short of cash in the same quarter, as the example shows.

Both statements look backwards. A 13-week cash flow forecast looks forwards, week by week, at expected receipts and payments, so you can see a shortfall before payday rather than after. The statement tells you what happened; the forecast tells you what to do next. For how to build and run one, see our guide to SME cash flow management.

Build your own in four steps

1. Export three months of bank statements to a spreadsheet, one line per transaction. Include every bank account and e-wallet the business uses.
2. Tag each line with one of eight codes: customers, suppliers, staff, rent and utilities, other operating, assets, loans, owner. Transfers between your own accounts get a ninth code and are excluded.
3. Subtotal by code, then group the codes into operating, investing and financing. Check that the opening balance plus the three net figures equals the closing balance to the ringgit. If it does not, a transaction is missing or counted twice.
4. Repeat monthly and keep the sheets side by side. Trends matter more than any single month.

An afternoon is enough for a business with a few hundred transactions a quarter. Accounting software can automate the tagging once you have set the rules.

Common mistakes

• Treating the owner’s capital injection as revenue. It is financing, and it hides a weak operating result.
• Recording the full hire purchase instalment as an expense. The principal portion is financing; only the interest is a cost in the P&L.
• Ignoring SST collected. It sits in your bank account but belongs to Customs, so set it aside mentally and, ideally, in a separate account.
• Including transfers between your own accounts, which inflate both receipts and payments.
• Reading the statement once a year when the accounts are finalised. By then the cash is already gone.

How Gusto Style can help

Our fixed-price Cash Flow & Budget Setup project builds the three-section statement and a rolling 13-week forecast for your business, tagged to your real bank data, and trains you or your admin staff to update them in under an hour a month. You leave with the five numbers above on one page, a cash buffer target, and a short list of actions to improve collections and spending. If your accounts are prepared under MPERS, we work with your accountant so that the two sets of numbers agree. See Cash Flow & Budget Setup