Skip to content
Nika

What is a Cash Flow Statement?

A cash flow statement is one of the three core financial statements. It reports every cash inflow and outflow during a period, grouped into three categories — operating activities, investing activities, and financing activities — and reconciles the opening and closing cash balances. It answers the single question the income statement cannot: where did the actual money go?

Operating activities cover the cash generated or consumed by the core business — receipts from customers, payments to suppliers and staff, taxes and interest. Investing activities capture purchases and sales of long-term assets: equipment, property, other businesses, and marketable securities. Financing activities show movements between the company and its capital providers — new loans drawn, loan principal repaid, shares issued or bought back, and dividends paid. The sum of the three plus the opening balance equals the closing cash balance.

The cash flow statement matters because profit and cash are not the same thing. A business can be profitable on paper and still run out of money — if customers pay slowly, if inventory builds up, or if a loan repayment falls due. Lenders and investors read the cash flow statement first because it is the hardest statement to manipulate: cash either moved or it did not. The indirect method starts from net income and adjusts for non-cash items like depreciation; the direct method lists actual cash receipts and payments. Both arrive at the same total.

Example

A profitable manufacturing business shows €200,000 net income but its cash balance fell by €30,000 over the year. The cash flow statement explains why: €80,000 went into a new machine (investing), €50,000 repaid a loan (financing), and customers paid €60,000 slower than expected — offsetting the operating profit.

Questions

Why can a profitable business have negative cash flow?

Because profit is an accrual-accounting concept and cash flow tracks actual money. If a profitable business sells heavily on credit, builds up inventory, buys equipment, or repays debt, cash leaves faster than profit arrives. The cash flow statement exposes this gap — which is why a profitable business can still go broke if it runs out of cash.

What is the difference between the direct and indirect methods?

Both produce the same final cash-flow total. The direct method lists actual cash received from customers and paid to suppliers and staff. The indirect method starts from net income and adjusts for non-cash items (depreciation) and changes in working capital (receivables, payables, inventory). The indirect method is far more common in practice because the data is already in the income statement.

See how Nika handles this

Related terms