Last updated on June 19th, 2025 at 09:52 am
Money moving in and out of a business tells the real story. A company might look great on paper with high revenues, but if cash isn’t flowing smoothly, trouble is just around the corner.
When it comes to a company’s financial health, the cash flow statement is one of the most important documents you will ever come across. It is the financial report that shows how much cash is coming in, where it’s going, and whether a company can stay afloat. Simple as that.
However, the problem is that many people either don’t understand the cash flow statement or don’t use it properly. And that can be dangerous. So, let’s break down this financial tool, why it matters, and how to use it effectively.
What is Cash Flow Statement?
A cash flow statement is a financial assertion that shows how cash moves in and out of a business during a specific period. It helps businesses, investors, and analysts understand whether a company is actually making money or just showing profits on paper.
Unlike a profit and loss statement, which includes non-cash items like depreciation, a cash flow statement focuses on real cash movements.
Cash Flow Statement Format
The format of a cash flow statement follows a structured approach based on accounting standards like IFRS and GAAP. The three sections give a clear picture of whether a business has enough cash to run smoothly or is struggling to manage its finances.
They are:
| Section | What it includes | Cash inflows | Cash outflows |
| Transactions
operating activities |
Cash from core business operations | Revenue from sales | Payments to suppliers |
| Investing activities | Cash from investments and asset transactions | Sale of assets | Purchase of machinery |
| Financing activities | Cash from funding and financial decisions | Bank loans, issuing shares | Dividend payments, loan repayment |
Companies usually prepare cash flow statements using either the direct method (showing actual cash transactions) or the indirect method (adjusting net income with non-cash items).
If you want to learn how they prepare these statements, you can learn from India’s top management institutes. IIM Lucknow’s applied finance course is a great place to start.
Objectives of Cash Flow Statement
Why do businesses even bother with a cash flow statement?
Because, without this, they would be running blind and making decisions without knowing if they actually have the money to back them up.
It serves multiple purposes, such as:
- Tracking liquidity: It helps businesses see if they have enough cash to cover expenses.
- Understanding solvency: Investors and creditors check if a company can meet long-term obligations.
- Better decision-making: Companies use it to decide when to invest, cut costs, or seek funding
- Detecting financial health issues: Even profitable businesses can collapse if their cash flow is negative
How to Optimise Cash Flow for Business Success?
Why Cash Flow Matters More Than Profits
Many businesses fail even when they show profits. It is because they don’t have cash when they need it.
A company may sell products worth millions, but if customers delay payments, the business can still go bankrupt due to cash shortages. Here’s a simple comparison between cash flow vs. profit:
| Factor | Profit-based business | Cash flow-focused business |
| Financial stability | Can struggle if cash isn’t available | Ensures enough money is on hand |
| Growth planning | Might expand too fast without cash | Expands sustainably |
| Risk of bankruptcy | High if credit sales are excessive | Lower due to liquidity control |
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How to Analyse a Cash Flow Statement
When you look at a cash flow statement, you need to understand what the numbers mean. Here’s how you can do it:
- Check operating cash flow: If a company is making profits but has negative cash flow from operations, that’s a red flag.
- Compare net income with cash flow: If profits are rising, but cash flow is dropping, something is off. It could mean excessive credit sales or poor cash management.
- Evaluate investing and financing activities: A company that is constantly borrowing money to survive may have serious financial problems. Similarly, heavy investments in assets could mean future growth.
- Look at free cash flow:
Free cash flow (FCF) = Operating Cash Flow – Capital Expenditures.
This tells you how much money is available after maintaining assets, which is crucial for long-term growth.
If analysing the cash flow statement sounds like something you’d like to master, structured learning can make a huge difference. Begin with understanding cash flow analysis and how to manage financial health.
Learn Cash Flow Management with the Right Courses
When you enter the finance world, understanding cash flow statements can be your first step. However, if you are looking to upgrade your skills, structured courses can help, such as:
- Executive Programme in Applied Finance, IIM Lucknow
- Postgraduate Financial Accounting and Management Program
- Postgraduate Financial Analysis Program
Conclusion
A cash flow statement is a tool that separates companies that thrive from those that collapse under financial mismanagement. Both in business and personal finance, it helps to make sound financial decisions.
If you are passionate about finance, this is an area worth mastering. The knowledge you gain can help you grow in your career, make better investment choices, and even start your own venture with confidence.
So, keep learning, keep improving, and make the most of every opportunity.
FAQs
- What is the difference between a cash flow statement and an income statement?
A cash flow statement tracks actual cash inflows and outflows, showing how much cash a business has at any given time. An income statement, on the other hand, records cash movements such as revenues, expenses, and even non-cash items.
- Which is better: Direct or Indirect cash flow method?
Both methods are useful in making a cash flow statement. However, the direct method is clearer, while the indirect method is easier to prepare.
- What causes negative cash flow?
High expenses, delayed payments, excessive debt, or poor financial management can start a negative cash flow and make a company go bankrupt sometimes.
- How do startups manage cash flow statements?
New companies and startups rely on investor funding, strict cost control, and efficient revenue collection strategies.
- Can a company be profitable but still have poor cash flow?
Yes, if revenues are high but payments are delayed, cash shortages can occur easily within a company.
- How can businesses improve cash flow?
Businesses can improve the cash flow statement by speeding up receivables, managing expenses, and controlling debt payments.
- How often should a cash flow statement be prepared?
Most businesses prepare cash flow statements quarterly and annually, but companies with tight cash cycles may review them monthly.