How to Prepare a Cash Flow Statement: Step-by-Step Guide for SMEs and Startups

Cash is the lifeblood of every business. You can have a great product, loyal customers, and even strong revenue, but without healthy cash flow, operations grind to a halt. For SMEs and startups, this is especially critical. Late collections, seasonal cycles, or unplanned expenses can mean the difference between growth and survival.

A cash flow statement provides the visibility business owners need to stay in control. It shows exactly how cash enters and leaves your business, whether through sales, investments, financing, or operating costs. More importantly, it directly ties into compliance obligations, such as VAT settlements, e-invoicing, and ZATCA reporting.

In this guide, we’ll explain what a cash flow statement is, why it matters, and how to prepare one step by step

What Is a Cash Flow Statement?

A cash flow statement is one of the three core financial statements, alongside the income statement and balance sheet. Its purpose is simple: to track cash inflows and outflows over a specific period.

It is typically divided into three sections:

1. Operating activities – Cash from day-to-day business (sales, supplier payments, payroll, VAT settlements). 
2. Investing activities – Cash from buying or selling long-term assets (equipment, property, sukuk, equity). 
3. Financing activities – Cash from loans, equity, dividends, or Islamic financing like Murabaha or Ijarah. 

By combining these, a cash flow statement reconciles net change in cash with beginning and ending balances, giving decision-makers a clear financial snapshot.

Key Nuances for Local Businesses

Preparing a cash flow statement in this region comes with unique considerations:

• IFRS and IFRS for SMEs are the standard accounting frameworks. 
• VAT at 15% requires careful handling—collections, refunds, and payments all impact operating cash flow. 
• ZATCA compliance (e-invoicing) accelerates collections and reduces disputes but adds settlement timing requirements. 
• Islamic financing (Murabaha, Ijarah, Tawarruq) must be classified correctly—profit payments are financing outflows, not operating expenses. 
• Seasonal cycles (Ramadan, Hajj/Umrah, school reopenings) affect sales and payments differently across industries. 
• Currency: Most SMEs use SAR as functional currency, but businesses dealing in USD must handle FX implications. 

Methods: Direct vs Indirect

There are two ways to prepare a cash flow statement:

Direct Method

List actual cash receipts and payments, cash from customers, cash paid to suppliers, salaries, and VAT settlements.

• ✅ Clearer operational insight. 
• ❌ More data-intensive, requires detailed records. 

Indirect Method

Starts with net income, adjusts for non-cash items (depreciation, zakat, expected credit loss), and working capital changes (AR, AP, VAT).

• ✅ Easier to prepare, aligns with IFRS. 
• ❌ Less transparency into actual cash movements. 

Most SMEs use the indirect method for compliance and reporting, but the direct method offers more actionable insights for internal management.

Step-by-Step: How to Prepare a Cash Flow Statement

Follow this structured process to create a reliable cash flow statement:

1. Gather Your Data

• Income statement (current period). 
• Balance sheets (start and end of period). 
• VAT ledgers and ZATCA submissions. 
• Bank statements and reconciliations. 
• AR/AP aging schedules. 
• Payroll, capex, and loan schedules. 

2. Operating Activities (Indirect Method Example)

• Start with net income. 
• Add back non-cash items: depreciation, amortization, zakat adjustments, ECL. 
• Adjust for working capital: 
  • Decrease in AR → add cash 
  • Increase in AR → reduce cash 
  • VAT payable/receivable adjustments 
• Subtract interest/profit payments if using Murabaha/Ijarah. 

3. Investing Activities

• Record purchases of PPE, property, and tech infrastructure. 
• Add proceeds from asset sales or sukuk/equity investments. 
• Exclude unrealized gains/losses (non-cash). 

4. Financing Activities

• Add equity injections or government grants (e.g., Monsha’at, SIDF). 
• Deduct dividends or partner withdrawals. 
• Record Murabaha principal repayments, Ijarah rentals, or loan proceeds. 

5. Reconcile

• Net change in cash = Operating + Investing + Financing. 
• Confirm it matches the change in the bank balance. 

Example: Simplified Cash Flow Statement

Key Metrics to Track

• Operating Cash Flow (OCF): Core measure of business health. 
• Free Cash Flow (FCF): OCF – Capex, for growth investments. 
• Cash Conversion Cycle (CCC): AR + Inventory – AP. 
• Cash Burn Rate/Runway: For startups. 
• Profit Coverage (Islamic finance): Ability to cover Murabaha/Ijarah profit. 

Common Mistakes SMEs Make

• Ignoring VAT timing or refunds. 
• Misclassifying Murabaha profit as operating instead of financing. 
• Mixing personal and business bank accounts. 
• Treating capex as expenses. 
• Forgetting to adjust for depreciation/ECL provisions. 

Cash Flow Forecasting

A 13-week rolling forecast helps SMEs stay ahead:

• Include VAT due dates, payroll, rent/Ijarah, and supplier terms. 
• Plan for seasonality (Ramadan promotions, Hajj spikes). 
• Use scenarios: base case, optimistic, conservative. 

Tools and Templates

• Spreadsheets with tabs for AR, AP, payroll, VAT, capex, and debt schedules. 
• Accounting software with ZATCA integration and VAT support. 
• POS, e-commerce, and open banking integrations for real-time feeds. 

Compliance and Reporting

• ZATCA VAT timelines: Monthly/quarterly filing impacts cash. 
• FATOORA e-invoicing: Improves collection speed. 
• Audit requirements: Banks and investors demand cash flow statements for facilities. 

Industry-Specific Notes

• Retail/e-commerce: COD vs prepaid, aggregator payouts. 
• Construction: Retentions, progress billings, long cycles. 
• F&B: High daily cash, delivery platforms. 
• Industrial/oil & gas: Milestone payments, LCs. 

FAQs

Is a cash flow statement required?
Yes—for compliance, financing, and investor readiness.

How does VAT impact cash flow?
Collections and settlements affect working capital significantly.

Which method should SMEs use?
Indirect for compliance, direct for operational insights.

How to classify Murabaha/Ijarah?
As financing outflows, not operating.

How often should it be prepared?
At least monthly, with rolling forecasts.

Conclusion

A well-prepared cash flow statement is more than a compliance document—it’s a decision-making tool. By tracking operations, investments, and financing, SMEs and startups can strengthen resilience, attract funding, and align with regulatory requirements like VAT and ZATCA.

Want to simplify your cash flow management? Explore automated tools like Lamha that save time and give real-time visibility