Cash flow statement

The cash flow statement exists because profit is an opinion and cash is a fact. It begins at net income and adjusts, step by step, until it arrives at the change in the cash balance, which can be verified against the bank.

It has three sections. Operating covers cash generated by running the business, and is where non cash charges get added back and working capital movements are captured. Investing covers buying and selling long lived assets, capital expenditure being the main one. Financing covers dealings with capital providers: raising or repaying debt, issuing or buying back shares, paying dividends.

The three part split is not bureaucratic, it is diagnostic. A healthy mature company generates cash from operations, spends some of it in investing, and returns the rest in financing. A company funding operating losses by raising debt has a very different shape, and you can see it at a glance without reading a word of commentary.

The most common analytical error is treating the operating section as if it were profit. It is not: it flatters a company that has stopped paying suppliers, and it punishes a company that is building inventory to support genuine growth. Both effects are working capital, both reverse, and neither says much about the underlying business.