Your cash report is not a cash flow statement

A cash report tells you what moved through the bank. Useful, but it cannot tell you why a business that made 40,000 in profit has 6,000 less in the bank than it started with. The statement of cash flows answers exactly that question.

Three sections, three questions

• Operating: did the actual trade of the business generate cash, or consume it?
• Investing: what did you spend on assets, and what did you get back from selling them?
• Financing: what did owners and lenders put in, and what was paid back out to them?

The indirect method, step by step

Start with net profit. Add back non-cash charges such as depreciation and amortisation, because they reduced profit without any money leaving. Then adjust for working capital: an increase in receivables is a use of cash, because you earned it but have not been paid. An increase in payables is a source, because you incurred a cost you have not yet settled. Inventory bought and unsold sits between your profit and your bank.

Growth consumes cash. The faster you sell on credit, the more of your profit is sitting in someone else's payment run.

What to read first

Look at net cash from operations against net profit. If operating cash is persistently far below profit, your receivables or inventory are absorbing the business. If operating cash is negative while financing is positive, you are funding trading losses with borrowings — solvable, but only if you know it is happening. Both patterns are invisible on a profit and loss and obvious on a properly prepared cash flow statement.

Read it with the notes

Numbered notes carry the detail the face of the statement omits: depreciation policy, the composition of receivables, the terms of loans. A statement without notes is a headline without an article, and it is the first thing a lender, a grant funder or an auditor will ask for.