What is the Statement of Cash Flows?

The Statement of Cash Flows

Every company relies on three key financial statements to track its performance:

• The Income Statement shows a company’s profitability over a period.
• The Balance Sheet provides a snapshot of what the company owns and owes at a specific moment.
• The Statment ofCash Flows  (SCF) explains how cash moved in and out of the business during that time.

Each of these statements tells a different part of the financial story. While the Income Statement and Balance Sheet help assess a company’s financial health, they don’t explain how cash actually moves through the business. A company can report strong earnings but still run into trouble if cash is tied up in receivables or large investments.

What is the Statement of Cash Flows?

The SCF is a report that shows how cash enters and exits a business. It focuses on actual cash transactions rather than accounting-based profit calculations. Because cash flow can come from multiple sources—not just sales—it’s grouped into three sections:

• Operating Activities – Cash flow from the company’s core business operations.
• Investing Activities – Cash spent or received from buying/selling assets.
• Financing Activities – Cash movements from loans, stock issuance, or dividends.

The SCF starts with Net Profit from the Income Statement, then adjusts for non-cash expenses (like depreciation), changes in working capital, and investment/financing activities. This provides a clear picture of how cash moved during the period.

The Statement of Cash Flow is also known as the Statement of Cash Flows or the Sources and Uses of Funds Statement. Regardless of the name, the purpose remains the same: to show how a business generates and spends cash over time.

What the SCF Is Not

The Statement of Cash Flow (SCF) is not the same as "cash flow" in everyday business. Many managers think of cash flow as the movement of cash in and out of the business during the current period—but that’s not what the SCF tracks.

• It is not a cash balance. The SCF doesn’t tell you how much cash is available right now. That’s what the Balance Sheet’s cash line shows.
• It is not a real-time cash tracker. The SCF looks backward at what already happened—it does not help predict future cash needs.
• It does not track short-term liquidity. Business owners and managers often need tools like cash flow forecasts or working capital reports to manage short-term cash flow.

The SCF is useful for accountants, analysts, and investors who want to see how cash moved over a period. But for daily decision-making, most business leaders rely on other financial tools to monitor and manage cash flow in real time.

‍

Cash Flow in Business: More Than Just Profit

A business can be profitable on paper but still struggle with cash flow. The Income Statement shows revenue and expenses based on accounting principles, but profit doesn’t mean cash in hand.

If customers take too long to pay, or if inventory builds up, cash can be tied up—even when the company is technically making money. Likewise, borrowing can boost cash flow temporarily, even if the business isn’t profitable.

Understanding the difference between cash flow and profit helps businesses make better decisions about funding operations, planning for growth, and managing liquidity.

How the SCF Connects to the Balance Sheet

The Statement of Cash Flows acts as a bridge between two balance sheets, explaining how the company’s cash position changed over time.

• The Balance Sheet provides a snapshot of cash at a single point in time.
• The SCF tracks movement—showing where cash came from and where it went during the reporting period.

While this historical report is useful for investors and analysts, managers often focus more on cash flow forecasts and real-time liquidity rather than looking at past cash movements.

‍

The Structure of the Statement of Cash Flows

The report begins with the net profit for the year, shown at the bottom of the Income Statement. However, because the Income Statement includes non-cash expenses, an adjustment is necessary.

Depreciation is a common example: while it appears as an expense, it doesn’t involve an actual cash outflow. Since the Cash Flow Statement tracks only cash movement, depreciation is added back to Net Profit.

Once depreciation is added back, a subtotal is generated: Cash Flow.

Next, you evaluate the changes in non-cash working capital between your current and previous balance sheets.  This includes non-cash current assets (inventories, receivables) and current liabilities (payables).

• If Receivables increase, customers are taking longer to pay, meaning less cash is available.
• If Inventories increase, more cash is tied up in products, leaving less cash on hand.
• If Payables increase, the company is holding onto cash longer by delaying payments to suppliers, resulting in more available cash.

After adjusting for these changes, the new subtotal is called Operating Cash Flow.

‍

The next section focuses on long-term investments, such as Property, Plant & Equipment (PP&E).

• If the company buys new equipment, cash is spent, reducing available funds.
• If the company sells equipment, it brings in cash, increasing liquidity.

After these adjustments, the new subtotal is called Free Cash Flow.

Finally, the last section looks at financing activities, which include changes in debt or equity.

• Cash increases when the company takes on new debt or issues more shares.
• Cash decreases when the company pays off existing debt, repurchases shares, or pays dividends.

‍

At the bottom of the report, the final calculation produces the Change in Cash—the difference in cash between the current and previous reporting periods. This figure matches the cash balance on the latest Balance Sheet. While it shows whether the company has more or less cash than before, the Cash Flow Statement as a whole explains how that change occurred by categorizing cash movements into operating, investing, and financing activities.

‍

Good And Bad Cash Flow

A simpler way to think about freed-up vs. tied-up cash is to categorize decisions as "good" or "bad" for your cash flow. This is what the Cash Flow Statement helps reveal—it tracks whether, from one year to the next, your business gained or used up cash.

• Good Cash Flow decisions bring cash into the business—such as receiving payments quickly, reducing inventory, selling fixed assets, or securing loans.
• Bad Cash Flow decisions tie up cash—such as delays in customer payments, stockpiling inventory, making large asset purchases, or aggressively paying down debt.

‍

Cash drives the business. A company can be profitable and still go bankrupt if it doesn’t have enough cash to operate—it happens all the time. The Cash Flow Statement is critical because it breaks down where cash came from and where it went.

Over time, the Cash Flow Statement helps assess financial sustainability. A business can’t keep extending payment terms to customers indefinitely without running into trouble. It also can’t survive on borrowed money forever—at some point, lenders will stop lending.

Profit vs. Cash

Analyzing cash flow has major implications for business decisions. A company can expand into a profitable opportunity and still face cash flow problems. If ramping up production takes time, customer payments are slow, or the company takes on significant debt for new equipment and inventory, cash outflows can exceed inflows—leading to financial trouble.

A company can go bankrupt even while running a profitable operation that would have paid for itself eventually.

Profit is a long-term measure of a company’s health. Cash flow represents immediate financial reality.

Cash flow is what keeps a business alive day to day.

Every business must monitor the relationship between profit and cash flow, especially when it comes to sales incentives.

One of the "sweeteners" that helps sales teams close deals is offering extended payment terms—90 days, six months, or even a year.

Every business must monitor the relationship between profit and cash flow, especially as it pertains to the sales team. One of the ‘sweeteners’ that helps salespeople close deals is if they can tell their customers they don’t have to pay for 90 days, or six months, or even a year.

• As far as the salesperson is concerned, their job is to make a profitable sale. They’re not always measured by the timing of the cash flow.
• It helps the customer too, because the cash flow out of the customer is delayed by 90 days (or six months or a full year!).

But the seller’s company needs the cash from the sale in order to keep functioning, so that profitable sale might actually harm the company.  

A Case Study in Cash Flow

In the early 90s, Marvel experienced a sales boom due to the collectibles market.  However, their reliance on comic book distributors and retailers who took too long to pay their invoices created severe cash flow problems. The delays in receiving payments from these distributors meant Marvel struggled to cover its operating costs.

‍The bubble soon burst, and coupled with debt from acquisitions like trading card company Fleer, the company filed for bankruptcy in 1996 despite high sales volumes, due to these cash flow issues.

Conclusion

Investors are the people most likely to request a Cash Flow Statement, using it to assess sustainability or identify excess cash that could be paid out as dividends.

But cash flow isn’t just an investor concern—it affects every part of a business. The Cash Flow Statement provides a structured way to analyze where cash is coming from and where it’s going, offering valuable insights for financial planning and decision-making.

While not everyone needs to work directly with the SCF, every leader, manager, and decision-maker needs to understand cash flow itself—because without cash, even a profitable business can fail.

‍

‍