The Cash Flow Statement
Follow the cash: how the statement splits money into operating, investing, and financing flows.
TL;DR
- Track real money with the
cashFlowStatement, not accrual profit. - Split cash into
operating, investing, and financing activities. - Reconcile the period's change back to your
endingCash.
What It Shows
Real CashActual money in and out, not accrual profit.
Follows the moneyOver a PeriodIt covers a span, like the income statement.
A span of timeExplains the ChangeTies beginning cash to ending cash.
Start + change = endKeeps Profit HonestShows whether profit became money.
Profit vs cash, side by sideThe Three Sections
OperatingCash from the everyday business.
Sales in, costs outInvestingBuying and selling long-term assets.
Equipment, propertyFinancingRaising and repaying money.
Loans, owner funds, drawsAdd Them UpThe three total the period's cash change.
Net change in cashThe Indirect Method
Start at Net IncomeBegin with profit from the income statement.
Net income firstAdd Back Non-CashDepreciation lowered profit but moved no cash.
+ depreciationAdjust Working CapitalAccount for changes in receivables and payables.
AR up = cash downReach Operating CashThe result is real cash from operations.
Profit reconciled to cashRead It Well
Lead With OperatingStrong businesses fund themselves from operations.
Operating cash is kingQuestion the PropsAsset sales or loans can flatter a weak period.
Where did the cash come from?Watch the GapProfit far above operating cash is a red flag.
Profit high, cash low?Complete the SetRead it with the other two statements.
One of three viewsTips
- Watch
operatingCashFlowmost closely; healthy businesses fund themselves from operations, not from loans or asset sales. - Use the
indirectMethodto see why profit and cash differ, since it starts at net income and adjusts for the gaps.
Warnings
- Positive
netIncomewith negative operating cash is a warning sign that profits are not turning into money. - Cash from selling equipment or borrowing is not
operatingCash; it can prop up a weak quarter and mask the real trend.
In Practice
Use the indirect method to reconcile profit to the change in cash.
Your business earns $16,000 net income, records $4,000 of depreciation, sees receivables rise $3,000, buys $10,000 of equipment, and borrows $5,000. You began the year with $8,000 cash.
- Operating: $16,000 + $4,000 - $3,000 = $17,000.
- Investing: bought equipment, so -$10,000.
- Financing: borrowed, so +$5,000.
- Net change: $17,000 - $10,000 + $5,000 = $12,000.
Cash grows $12,000, from $8,000 to $20,000 at year-end.
The three sections explain every dollar your cash balance moved.
FAQ
It tracks the actual cash moving in and out of a business over a period and explains why the cash balance changed. It sorts every flow into three buckets, operating, investing, and financing, and ties the beginning cash balance to the ending one. It is the statement that keeps profit honest by showing real money.
Operating covers cash from the core business, selling to and paying for the day-to-day. Investing covers buying and selling long-term assets like equipment. Financing covers raising and repaying money, loans, owner contributions, and withdrawals. Add the three together and you get the net change in cash for the period.
The most common way to build the operating section. It starts with net income, then adds back non-cash costs like depreciation and adjusts for changes in items like receivables and payables. The result reconciles profit to the actual cash the business generated, which is why it makes the profit-versus-cash gap visible.
Because profit and cash follow different clocks. You can book a sale as profit before the customer pays, tie up cash in inventory, or repay a loan that never touched the income statement. The cash flow statement surfaces these gaps, which is why lenders and owners watch operating cash flow so closely.