From the finance director's chair
How to read a cash flow statement in 5 minutes
Profit depends on accounting rules and judgment calls. Cash in the bank is much harder to argue with. The cash flow statement shows where the cash went, and it's simpler than it looks.
- The cash flow statement shows where cash actually came from and went, in three boxes: operating, investing and financing.
- Operating cash flow is the one to read first: does running the business bring cash in?
- Compare it with net profit. A big gap tells you where to look.
Why a second report at all?
The P&L records a sale when you deliver, not when the customer pays. It spreads the cost of a machine over years, even though you paid for it on day one. That's fair accounting, but it means profit and cash can drift far apart. The cash flow statement shows the actual money.
The three boxes
1. Operating activities: does the business itself make cash? It starts from net profit and adjusts it. Add back depreciation, which cost no cash this year. Then subtract the cash that got stuck: customers who haven't paid, and stock sitting in the warehouse. (Real statements have a few more adjustment lines, but these are the big ones.)
2. Investing activities: what did we spend on the future? New machines, buildings, software, acquisitions. This is usually negative, and that's fine for a business that is growing.
3. Financing activities: who funded the gap? New loans, loan repayments, money from shareholders, dividends paid out.
The three add up to the change in the company's cash over the year (cash in the bank plus very short-term deposits, with a small line for currency moves if the company trades abroad). That's it.
Quick math: profit that never became cash
Halvard Coffee Systems, our fictional company, made $3.65m of net profit in 2024. In this simplified example, add back $1.3m of depreciation and you might expect about $4.95m of cash from operations. But customers were paying later and more stock was waiting to ship, which absorbed exactly that amount.
Result: zero cash from operations, in a profitable year. That's how a company ends up needing the bank while its P&L looks healthy. We unpack why in why profitable companies run out of cash.
The 5-minute routine
- Find cash from operations. Positive? Good start.
- Compare it with net profit. Roughly similar, or higher? Healthy. Much lower? Look at receivables and inventory.
- Check investing. Is the company spending on its future, or starving it?
- Check financing. Is new debt paying for the day-to-day business? That's a warning sign.
- Look at the bank balance at the end, and how many months of costs it covers.
Why it matters to you
If you manage customers, stock or projects, you influence operating cash flow more than you think. Every invoice that goes out late, every order shipped before it's paid for, every pallet that sits in the warehouse shows up here.
I read the cash flow statement before the P&L. If operating cash is well below profit for two years running, I want to know why before I hear anything about growth.
"How does our operating cash flow compare with our profit, and what's absorbing the difference?"