What Is a Cash Flow Statement?

When evaluating a company’s financial health, profit alone doesn’t tell the full story. A business can show profits on paper and still struggle to pay salaries, suppliers, or loans. This is where the cash flow statement becomes crucial.

In this blog, we’ll explain what a cash flow statement is, why it matters, its components, and how investors should use it for better decision-making.

What Is a Cash Flow Statement?

A cash flow statement is a financial statement that shows how cash and cash equivalents move in and out of a business during a specific accounting period.

Unlike the profit & loss statement, which is based on accrual accounting, the cash flow statement focuses purely on actual cash transactions.

📌 In simple terms, it answers one key question:
How much real cash did the company generate and use?

Why Is a Cash Flow Statement Important?

The cash flow statement helps:

• Assess a company’s liquidity
• Understand its ability to meet short-term obligations
• Evaluate operational efficiency
• Identify reliance on borrowing or asset sales
• Judge long-term financial sustainability

For investors, cash flow analysis often reveals red flags that profits may hide.

Components of a Cash Flow Statement

A cash flow statement is divided into three main sections:

1. Cash Flow from Operating Activities (CFO)

This section shows cash generated from a company’s core business operations.

Includes:

• Cash received from customers
• Cash paid to suppliers and employees
• Operating expenses
• Taxes paid

📌 Positive operating cash flow indicates a healthy business model.

2. Cash Flow from Investing Activities (CFI)

This section reflects cash used for or generated from long-term investments.

Includes:

• Purchase or sale of fixed assets
• Investment in subsidiaries
• Sale or purchase of securities

📌 Consistent negative investing cash flow often signals business expansion, not necessarily a problem.

3. Cash Flow from Financing Activities (CFF)

This section shows cash movements related to funding the business.

Includes:

• Issuance or repayment of loans
• Equity issuance
• Dividend payments

📌 Heavy reliance on financing cash flow may indicate weak internal cash generation.

Example: How to Read a Cash Flow Statement

A strong company typically shows:

• Positive cash flow from operations
• Controlled investing outflows
• Limited dependence on external financing

🚩 Warning signs include:

• Negative operating cash flow over multiple years
• Rising debt to fund daily operations
• High profits but weak cash generation

Cash Flow Statement vs Profit & Loss Statement

Basis	Cash Flow Statement	Profit & Loss Statement
Accounting	Cash-based	Accrual-based
Focus	Actual cash movement	Income and expenses
Manipulation Risk	Low	Higher
Liquidity Insight	Strong	Limited

📌 Investors often trust cash flow more than profits.

Why Investors Should Analyse Cash Flow Carefully

For equity investors, the cash flow statement helps:

• Identify quality companies
• Validate earnings sustainability
• Avoid companies with aggressive accounting
• Understand dividend-paying capacity
• Assess long-term value creation

It is especially useful while analysing:

• Capital-intensive businesses
• High-growth companies
• Debt-heavy firms

Common Mistakes While Reading Cash Flow Statements 🚫

• Focusing only on net profit
• Ignoring negative operating cash flow
• Assuming all negative investing cash flow is bad
• Not comparing cash flow trends year-on-year
• Overlooking dividend payments and debt servicing

How JM Financial Services Helps in Financial Statement Analysis

Institutions like JM Financial Services help investors:

• Analyse company fundamentals holistically
• Interpret cash flow statements correctly
• Identify financially strong businesses
• Align stock selection with long-term goals
• Make informed equity investment decisions

Understanding cash flow is a key part of disciplined investing.

Key Takeaways

✔ Cash flow statement shows real cash movement

✔ Operating cash flow reflects core business strength

✔ Investing cash flow signals growth or asset sale

✔ Financing cash flow shows funding dependence

✔ Cash flow analysis improves investment quality

Frequently Asked Questions (FAQs)

1. Is cash flow statement mandatory?

Yes, it is mandatory for most companies as per accounting standards.

2. Can a profitable company have negative cash flow?

Yes, due to delayed receivables or high expenses.

3. Which cash flow is most important?

Operating cash flow is the most critical for sustainability.

4. Is negative investing cash flow bad?

Not always—it may indicate expansion or capacity building.

5. Should investors rely more on cash flow or profit?

Both matter, but cash flow is harder to manipulate.