The statement owners skip and later regret skipping. Profit is earned the moment you invoice; cash arrives only when the customer pays. The cash flow statement is where that gap becomes visible.

Definition

Cash Flow Statement - a financial statement that reports the actual movement of cash into and out of a business over a period, grouped into operating, investing and financing activities.

Formula
Net Change in Cash =
   Operating Cash Flow
 + Investing Cash Flow
 + Financing Cash Flow

Common uses

  • Reality check - did the period's profit turn into cash
  • Liquidity - is the operating business self-funding
  • Runway - how fast cash is being consumed or generated

Watch out

Positive profit with negative free cash flow is the classic trap: the business looks healthy on the profit and loss statement while the bank balance falls. Something is tying up cash, usually slow receivables or inventory.

Related terms

See why this gap sinks profitable businesses in Why Profitable Businesses Run Out of Cash and browse Cash Flow Management.