What is a Cash Flow Statement?
The cash flow statement (statement of cash flows) shows how cash moves in and out of a company over a period. While the income statement can be affected by accounting choices, the cash flow statement reveals actual cash generated and spent—making it essential for understanding a company’s true financial health.
Why Cash Flow Matters
“Revenue is vanity, profit is sanity, cash is reality.”
Cash Flow vs. Net Income
| Factor | Net Income | Cash Flow |
|---|---|---|
| Basis | Accrual accounting | Actual cash |
| Non-cash items | Includes depreciation, stock comp | Excluded/adjusted |
| Revenue recognition | When earned | When received |
| Manipulation | More susceptible | Harder to fake |
A company can show profits while running out of cash—cash flow reveals the truth.
Three Sections
| Section | Shows |
|---|---|
| Operating Activities | Cash from core business |
| Investing Activities | Cash for long-term assets |
| Financing Activities | Cash from debt/equity |
Operating Activities (CFO)
Cash generated from primary business operations:
Starts with Net Income, then adjusts for:
Add Back Non-Cash Expenses:
- Depreciation & Amortization
- Stock-Based Compensation
- Deferred Taxes
Adjust for Working Capital Changes:
- (Increase) in Accounts Receivable
- (Increase) in Inventory
- Increase in Accounts Payable
Example Operating Section
| Item | Amount |
|---|---|
| Net Income | $100M |
| + Depreciation | $20M |
| + Stock-Based Comp | $10M |
| − Increase in A/R | ($15M) |
| − Increase in Inventory | ($10M) |
| + Increase in A/P | $5M |
| Cash from Operations | $110M |
Investing Activities (CFI)
Cash spent on or received from long-term assets:
| Activity | Cash Flow |
|---|---|
| Capital Expenditures (CapEx) | Outflow |
| Acquisitions | Outflow |
| Sale of Assets | Inflow |
| Purchase of Investments | Outflow |
| Sale of Investments | Inflow |
Example Investing Section
| Item | Amount |
|---|---|
| Capital Expenditures | ($30M) |
| Acquisition of Business | ($50M) |
| Sale of Equipment | $5M |
| Cash from Investing | ($75M) |
Negative investing cash flow is often good—it means the company is investing in growth.
Financing Activities (CFF)
Cash from debt and equity transactions:
| Activity | Cash Flow |
|---|---|
| Issuing Stock | Inflow |
| Issuing Debt | Inflow |
| Repaying Debt | Outflow |
| Share Buybacks | Outflow |
| Dividends Paid | Outflow |
Example Financing Section
| Item | Amount |
|---|---|
| Debt Repayment | ($20M) |
| Share Repurchases | ($30M) |
| Dividends Paid | ($15M) |
| Cash from Financing | ($65M) |
Cash Flow Summary
| Section | Amount |
|---|---|
| Cash from Operations | $110M |
| Cash from Investing | ($75M) |
| Cash from Financing | ($65M) |
| Net Change in Cash | ($30M) |
| Beginning Cash | $100M |
| Ending Cash | $70M |
Free Cash Flow
The most important cash metric:
$$\text{Free Cash Flow} = \text{Operating Cash Flow} - \text{CapEx}$$
Free cash flow is what’s available to:
- Pay dividends
- Repurchase shares
- Pay down debt
- Make acquisitions
- Build cash reserves
See: Free Cash Flow
Cash Flow Patterns by Company Stage
| Stage | Operating | Investing | Financing |
|---|---|---|---|
| Startup | Negative | Negative | Positive |
| Growth | Positive | Negative | Positive/Negative |
| Mature | Positive | Negative | Negative |
| Declining | Positive/Negative | Positive | Negative |
Red Flags to Watch
Watch for:
- Negative operating cash flow (especially if profitable)
- Cash flow much lower than net income consistently
- Growing receivables faster than revenue
- Heavy reliance on financing to fund operations
Healthy Signs:
- Operating cash flow > Net income
- Positive free cash flow
- Cash flow growing over time
- Self-funding growth from operations
Cash Flow Analysis Ratios
| Ratio | Formula | Purpose |
|---|---|---|
| Operating Cash Flow Ratio | CFO ÷ Current Liabilities | Liquidity |
| Cash Flow to Debt | CFO ÷ Total Debt | Solvency |
| FCF Yield | FCF ÷ Market Cap | Valuation |
| Cash Conversion | CFO ÷ Net Income | Earnings quality |
Three Financial Statements Connected
| Statement | Connection |
|---|---|
| Income Statement | Net income starts CFO |
| Balance Sheet | Ending cash appears here |
| Cash Flow Statement | Explains cash changes |
Related Financial Terms
This glossary entry is for educational purposes only and does not constitute investment advice.