A cash flow statement reports the inflows and outflows of cash over a period, divided into three categories: operating activities, investing activities, and financing activities. It shows how a company generates and uses cash, complementing the P&L by revealing the actual cash impact of business operations.
In Depth
The cash flow statement answers a question the P&L cannot: where did the cash actually go? A company can report healthy profits on its income statement while simultaneously running out of cash — a situation that has sunk many otherwise viable businesses. The cash flow statement bridges this gap.
Operating cash flow starts with net income and adjusts for non-cash items (depreciation, amortisation, share-based compensation) and changes in working capital (movements in receivables, payables, and inventory). A business that consistently converts profits into operating cash flow is fundamentally healthy.
Investing cash flow captures capital expenditure (property, equipment, software development), acquisitions, and asset disposals. For growth companies, this section is typically negative as the business invests in future capacity.
Financing cash flow includes debt drawdowns and repayments, equity issuances, dividends, and share buybacks. Startups raising venture capital will show large positive financing cash flows during funding rounds.
For FP&A teams, cash flow forecasting is arguably more important than P&L forecasting. Cash flow determines whether the business can meet payroll, pay suppliers, service debt, and fund growth investments. A thirteen-week rolling cash flow forecast is standard practice for businesses managing tight liquidity.
UK-specific considerations include quarterly VAT payments to HMRC, corporation tax instalments for larger companies, and the timing of PAYE and National Insurance remittances. These outflows can create significant cash flow peaks and troughs that must be planned for.
Real-World Example
A Leeds-based software company reports £500K net profit but only £280K operating cash flow because accounts receivable grew by £180K and prepaid expenses increased by £40K. The investing section shows £120K in capitalised development costs. After a £200K loan repayment in financing, free cash flow to equity is just £-40K, prompting the CFO to tighten payment terms with customers.
Related Terms
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