DotOne teamWhat is a cash flow statement?
A cash flow statement is one of the three main financial statements, alongside the profit and loss statement and the balance sheet. It reports the actual movement of cash and cash equivalents during a period, sorted into three activities: operating, investing and financing.
The profit and loss statement records income when it is earned and expenses when they are incurred, whether or not money has changed hands. The cash flow statement records only cash. That is why it is the best guide to whether a business can pay its suppliers, salaries and loan instalments on time.
In India, companies prepare it under Ind AS 7 or AS 3, depending on which accounting standards apply to them. Under the Companies Act, 2013 it is part of a company's financial statements. One person companies, small companies and dormant companies are exempt.
The three sections of a cash flow statement
1. Cash flow from operating activities
Cash from the core business: receipts from customers, and payments to suppliers, employees and for running expenses and taxes. For most businesses this is the section that matters most. A healthy business generates cash here year after year.
2. Cash flow from investing activities
Cash spent on or received from long-term assets: buying machinery, building a shed, buying or selling investments, or selling an old vehicle. A growing manufacturer usually shows an outflow here.
3. Cash flow from financing activities
Cash from or to the people who fund the business: new loans, loan repayments, fresh capital from owners, and dividends or drawings.
The check: opening cash + net cash from all three sections = closing cash. Closing cash must match the cash and bank balance in your balance sheet.
Direct vs indirect method
Operating cash flow can be presented in two ways. Investing and financing sections are the same under both.
- Direct method: lists actual cash received from customers and paid to suppliers and employees. Easy to read, but needs cash-level detail of every transaction.
- Indirect method: starts with net profit and adjusts for non-cash items (such as depreciation) and changes in working capital (receivables, inventory, payables). Most Indian businesses and their CAs use this method because it can be built from the profit and loss statement and two balance sheets.
Cash flow statement example (indirect method)
A mid-sized manufacturer, figures in ₹ lakh, for the year:
| Item | ₹ lakh |
|---|---|
| Operating activities | |
| Net profit before tax | 50 |
| Add: depreciation (an expense, but no cash goes out) | 8 |
| Less: increase in trade receivables (sales not yet collected) | (15) |
| Less: increase in inventory (cash tied up in stock) | (10) |
| Add: increase in trade payables (purchases not yet paid) | 6 |
| Less: income tax paid | (10) |
| Net cash from operating activities | 29 |
| Investing activities | |
| Purchase of a new CNC machine | (25) |
| Net cash used in investing activities | (25) |
| Financing activities | |
| Term loan taken | 10 |
| Loan instalments repaid | (4) |
| Net cash from financing activities | 6 |
| Net increase in cash (29 − 25 + 6) | 10 |
| Opening cash and bank balance | 12 |
| Closing cash and bank balance | 22 |
The business made ₹50 lakh before tax, but operations produced only ₹29 lakh of cash. ₹25 lakh is sitting with customers and in the warehouse as extra receivables and stock. That is the gap between profit and cash.
How to read a cash flow statement
- Is operating cash flow positive? If it is negative year after year while profit is positive, collections or inventory are out of control.
- Compare operating cash flow with net profit. Operating cash consistently far below profit usually means customers are paying slower or stock is building up.
- Is investment funded by operations or by loans? Buying machines from operating cash is sustainable. Funding them, and the day-to-day business, from fresh borrowing is a warning sign.
- Look at working capital lines. Big swings in receivables, inventory and payables tell you where cash is going, and they are the lines you can act on fastest.
How to improve cash flow in a manufacturing business
- Collect faster. Track receivables ageing every week and follow up before invoices go overdue.
- Hold less stock. Set reorder levels from actual consumption so you stop over-buying slow-moving material.
- Plan purchases with production. Buy against the production plan, not on habit, and negotiate payment terms with key vendors.
- Bill the moment you dispatch. Every day between dispatch and invoice is a day added to your collection cycle.
DotOne gives you a funds and cash flow view built from live sales and purchase data, with receivables by customer and payables by due date. Its financial reports include a cash flow statement, alongside P&L and balance sheet, and the books can also sync to Tally.