What is a Cash Flow Statement? Format, Analysis & Template

In 2023-24, Tata Motors reported a net profit of ₹17,407 crore. At first glance, this appears to be a positive financial outcome; after all, profit is what any corporation strives for. But if you also discovered that their financial reserves, or "cash in hand," decreased during the same year. Does this sound contradictory? How can a corporation make millions of crores of rupees in profit while experiencing a liquidity shortage?

This is where the Cash Flow Statement comes into play, an important financial document that frequently receives little attention. Most people pay attention to the Profit & Loss (P&L) Statement, which displays how much a company made and spent during a given time. However, P&L only reports accounting profit, which includes non-cash items such as depreciation and unpaid revenue. It does not display the actual movement of money, the literal inflow and outflow of cash.

The Cash Flow Statement closes this gap by dividing the company's cash activities into three major categories:

1. Cash Flow from Operating Activities - How much cash is generated by the company's basic business operations?
    
2. Cash Flow from Investing Activities - Money spent or gained on the purchase or sale of assets such as equipment or property.
    
3. Cash Flow from Financing Activities - Cash inflows and outflows associated with loans, debts, and equity.

In Tata Motors' situation, while achieving a net profit of ₹17,407 crore, a significant amount of cash may have been utilised to repay debt, acquire additional factories, or increase inventories, resulting in a decline in the actual cash balance.

Let us simplify.

Even if you earn ₹1,00,000 per month, spending ₹1,20,000 on shopping, rent, and loan EMIs can cause your bank account balance to decrease. Similarly, for businesses, cash flow is paramount.  Even a profitable company can struggle if its cash flow is not properly managed.  That is why the cash flow statement is so important; it indicates a company's true liquidity health, which goes beyond what profit numbers show.

What is a Cash Flow Statement?

A Cash Flow Statement is one of three key financial statements used by businesses and investors to assess a company's financial health. The remaining two are the Income Statement (Profit and Loss Statement) and the Balance Sheet. While the income statement displays profitability and the balance sheet reveals assets and liabilities, the cash flow statement focuses only on real-time cash movements, the money that comes in and goes out of the company.

It tracks these inflows and outflows over a specific period, usually quarterly or annually, and divides them into three categories: operating activities, investing activities, and financing activities. This detailed breakdown enables stakeholders to understand the source of the funds and how they are being allocated.

Why is a Cash Flow Statement Important?

Because profit does not necessarily equal cash in hand. A company's profits may appear to be good on paper, but if that money is locked in unpaid bills or inventory, it cannot be used to pay salaries, rent, or debts.

Assume a corporation claims a profit of ₹10,00,000. However, if the majority of this profit comes from clients who have yet to pay, the company may still be short on cash. In such circumstances, the cash flow statement reveals the true situation, whether the company is liquid or suffering with day-to-day operations.
 

This demonstrates that, despite the huge profit, actual cash is rather modest.

Types of Cash Flow Activities

A Cash Flow Statement is organised into three main categories. Each category represents a different form of cash flow, allowing us to understand not just how much cash is moving but also why it is going.

1. Operating Activities

Operating activities describe the business's basic operations, the day-to-day tasks that keep it going. This section details the cash collected and spent directly from the company's principal activities, such as selling products or providing services.

Examples of operating cash flows are:

• Cash received from customers
• Payments given to suppliers for products or raw materials
• Salaries and salaries for employees
• Rent, power, and other administrative costs.
• Income Tax Payments

Even if a company makes a profit, its operating cash flow can be negative if customers fail to pay or if too much money is spent up front on expenses.

Example:
 

This indicates the business earned ₹2,00,000 in cash purely from its regular operation, a good sign of liquidity.

2. Investing Activities

Investing activities represent how a corporation spends or makes money via long-term investments. These do not happen every day, yet they are critical for long-term progress.

Examples of investment activities:

• Purchase of fixed assets such as land, buildings, and machinery
• Sale of outdated or unused assets.
• Investing in the stock or bonds of other companies
• Loans given or received (if part of the business activity).

These cash flows frequently display a negative value, which isn't always bad; it could just indicate that the company is expanding or updating its facilities.

Example:
 

3. Financial Activities

Financing operations demonstrate how a corporation raises money and returns it to investors or creditors. It includes cash movements relating to capital and debt.

Examples include:

• Loans taken or repaid
• Interest paid on borrowings
• Equity issuance or share repurchase
• Dividends paid to shareholders.

This section provides an overview of how the company is funded and manages its capital structure.
 

Cash Flow vs Profit – What’s the Difference?

A successful company may still experience cash flow issues. Let us understand why:
 

Observation: Profit does not imply liquidity. Company B, while less profitable, has more actual cash.

Format of a Cash Flow Statement (As per Indian Accounting Standards)

Here’s a simple format for reference:

Cash Flow Statement for XYZ Ltd.
(For the year ended 31st March 2025)

A. Cash Flow from Operating Activities

• Net Profit before Tax
• Adjustments for:
  • Depreciation
  • Interest Paid/Received
• Operating Profit before Working Capital Changes
• Net Cash from Operating Activities

B. Cash Flow from Investing Activities

• Purchase/Sale of Assets
• Investment in Shares/Mutual Funds

C. Cash Flow from Financing Activities

• Issue/Repayment of Debt
• Dividend Paid
• Share Capital Raised

D. Net Cash Flow

A + B + C

Illustration:
 

How to Prepare a Cash Flow Statement – Step-by-Step?
 

• Start with Net Profit: Take the net profit figure from the Income Statement.
   
• Include non-cash expenses, such as depreciation and amortisation.
   
• Adjust for working capital changes:
  • Increase or decrease in receivables
  • Inventory changes.
  • Payables Movement
     
• Include Investment Activities:
  • Cash is used to purchase assets.
  • Cash received from selling assets.
     
• Include Financing Activities:
  • Loans taken or repaid
  • Equity issued.
  • Dividends paid.
     
• Calculate the Net Cash Flow:
  • Add all categories to determine the total cash made or utilised.
     
• Arrive at the Closing Cash Balance.

Cash Flow Statement Example (Direct Method)
 

Cash Flow Statement Example (Indirect Method)
 

Both methods are correct; the choice depends on the regulatory requirement or business preference.

How Investors Use the Cash Flow Statement?

Investors often examine a company's cash flow statement to determine its financial reliability. It helps them understand whether the business

• Has enough liquidity to run operations.
• Can expand sustainably without incurring significant debt.
• Dividends are paid out regularly to shareholders.
• Utilises its cash for productive and responsible objectives.

Case Study: If a company has high profitability but little cash flow, investors may reconsider investing due to cash crunch risks.

Example Table:
 

What is Free Cash Flow (FCF)?

Free Cash Flow (FCF) is the cash left over after deducting capital expenditures from operating cash flow.

Formula: FCF = Operating Cash Flow - Capital Expenditure.

It illustrates how much money a corporation has available to reinvest, decrease debt, or pay dividends.
 

Investors prefer companies with continuously positive FCF.

Conclusion

A cash flow statement is the financial heartbeat of any company.  It's not only about profit; it's about how much money came in, went out, and what's left over.  Whether you're a founder, freelancer, or investor, analysing cash flow weekly assures better, long-term financial decisions.

FAQs

Q1. Is profit equivalent to cash flow?

No, profit is measured on an accrual basis, but cash flow represents actual money movement.

Q2. Can a prosperous corporation generate negative cash flow?

Yes. If receivables are excessive or inventory is overstocked, cash flow may be impacted.

Q3: Is negative cash flow bad?

Not always. If the company is properly capitalised, this could indicate that it is investing in expansion.

Q4: Which is more important, cash flow or profit?

For liquidity and sustainability, cash flow is more critical in the short run.

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