Cash flow statement

What it means

The cash flow statement shows where money came from and where it went, split into three streams: operating, investing and financing activity.

Unlike the income statement it ignores non-cash costs. It explains the gap between profit and the balance in the bank, which otherwise stays a mystery.

Cash in the statement means more than notes and the bank balance: it includes cash equivalents, short-term, readily convertible financial assets with an insignificant risk of changes in value, such as a short fixed-term deposit. Whatever a company counts as an equivalent it has to apply the same way every year, or the statements cannot be compared.

How it works in practice

It is built by the indirect method: profit is adjusted for non-cash items (depreciation, provisions) and for changes in working capital.

For management a monthly version beats the annual statement. It shows whether operations generate cash or the company is staying afloat on loans and unpaid suppliers.

A typical case: an s. r. o. reports a profit, the owner wants to pay out a dividend, and there is not enough money in the account. From the statement we show how much cash got stuck in receivables and stock and how much went on loan repayments or investment, which is the basis for deciding how much to pay out and when.

What to watch out for

Positive operating cash flow alongside growing overdue payables is not good news. The company is "saving" by not paying, and that runs out before the underlying cause can be fixed.

A common mistake is putting principal repayments on a lease or loan into operating activity. Operating cash flow then looks worse than it is and financing better, and a bank assessing creditworthiness reads a different story from the one the company actually has.