The cashflow statement is the third primary financial statement, after P&L and balance sheet. It explains how cash moved during the period, and why a profitable company can still run out of cash, or vice versa.
What you'll learn
→ The three sections → Direct vs indirect method → What working capital movements tell you → Free cashflow and what really mattersThe three sections
Operating activities: cash generated from running the business, collecting from customers, paying suppliers, paying employees. This should be positive sustainably; it funds everything else.
Investing activities: cash spent on or generated from long-term investments, buying equipment, selling assets, acquiring or divesting other businesses. Healthy growth typically shows negative investing cash (you are reinvesting). Financing activities: cash from loans, repayments, share issues, dividends. Tells you how the business is funded externally.
Direct vs indirect method
Direct method: list cash receipts from customers, cash paid to suppliers, cash paid to employees, etc. The reader sees exactly where cash came from and where it went. Most readable, but more demanding to produce.
Indirect method: start with operating profit, then adjust for non-cash items (depreciation, provisions) and changes in working capital (receivables, inventory, payables) to arrive at cash from operations. More common because it ties directly to the P&L and balance sheet.
What working capital movements tell you
Receivables increased: revenue was billed but not yet collected, cash trails P&L. Receivables decreased: collections caught up with billings, cash improves. Inventory increased: cash converted to stock, strain unless sales lined up. Payables increased: you stretched suppliers, cash improved short-term but may damage relationships.
These movements are why a profitable company can still run out of cash, fast growth in revenue typically grows working capital faster than profit, eating cash. Track each working capital line month-on-month, not just the total.
Free cashflow and what really matters
Free cashflow = operating cashflow minus capex. It is the cash available to repay debt, return to shareholders, or invest in growth beyond essential capex. For most SMEs, this is the most important number that does not appear directly on either P&L or balance sheet.
Run a 13-week cashflow forecast continuously, refreshed weekly with actuals. It is the most useful internal management tool we know of. Acowntant builds this automatically; for manual builds, a spreadsheet with weekly columns and running balance is fine.
This guide is general information, not professional advice. For situations that involve specific facts, talk to your accountant, or hire one of ours from the marketplace.