How to Read a Statement of Cashflows

Interpreting the four financial statements will allow you as an entrepreneur to have a better depiction of how your company is performing. Primary financial statements are the cash flow statement. It is also, arguably, the least estimated financial statement.

The cash flow statement is an evaluation of cash management of a company. Failure to get it right can result in the company having problems with cash flow. Actually as Webinar Care points out, 60 percent of the SMEs end up failing because of cash flow issues.

Wonder whether your company is financially healthy? One of the solutions is to know how to read your cash flow statement.

A statement of cash flow shows the financial strength and solvency of the business. It reflects the business in terms of its ability to settle its debts.

This guide offers an easy and straightforward method of understanding a cash flow statement and getting valuable information out of it.

What is a Cash Flow Statement, and Why is it Important?

A cash flow statement is one of the three key financial statements. It provides the inflow and outflow of cash in the business. (Quite literally, every number on the cash flow statement shows money coming in or out of the company.)

A cash flow statement is important because, unlike the income statement, it shows the actual money that the business has on hand. Why is this important? A company might show a great profit figure on the income statement but be low on cash. This affects the company’s ability to cover its expenses, thereby reducing its liquidity.

A negative cash flow might not necessarily spell disaster for the company.

Stay tuned for a discussion of the reasons and factors behind negative cash flows later in this guide.

Overview of the Three Main Sections of the Cash Flow Statement

1.Cash flows from operating activities

This is the first section of the cash flow statement. It shows the total cash generated from the company’s core activities, its operations. The cash figure here indicates the company’s cash profit from operations (Harvard Business School).

2.Cash flows from investing activities

This section shows the cash generated from investing activities, such as interest and dividends from the company’s investments.

This section will also include irregular payments/receipts due to non-current assets. For example, if a company buys machinery costing $ 2,000, a cash outflow of $ 2,000 will be recorded here. Similarly, a company might sell its property, which is shown as a cash inflow.

3.Cash flows from financing activities

Financing activities include issuing or repaying debt, issuing or buying back shares, and paying dividends. Essentially, this section shows how the company funds its operations and growth through external sources or returns capital to shareholders.

Real Example of a Cash Flow Statement

Cash Flow All numbers in thousands

Oceanaides Int. I 2024-12-31

How to Read a Cash Flow Statement

Any cash flow statement should have the following key sections (Harvard Business School):

• Cash flow from operating activities
• Cash flow from investing activities
• Cash flow from financing activities
• Cash flows from Operating Activities

This section shows the cash flow generated by the business’s day-to-day operations.

Let’s start digging into what the numbers in the above statement mean (Harvard Business School):

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Net Income

The top number on the cash flow statement is the net income. The net income figure comes from the income statement.

Non-Cash Expenses:

Depreciation and Amortization

Depreciation and amortization are added to the cash flow statement because they are non-cash expenses.

For example, someone buys machinery for $30,000. The machine depreciates by 5% each year. So, the yearly depreciation expense of $1500 will be added to the cash flow statement. $ 1,500 is not an expense paid in cash; it is the loss in the machinery’s physical value.

Deferred Income Taxes

Like depreciation, deferred income taxes are noncash expenses that are added back to the cash flow statement.

Changes in Working Capital:

The cash flow statement above shows that Oceanaides Int. reported a $219,000 change in working capital.

Working capital= Current Assets – Current Liabilities

A positive working capital figure indicates that the company either took onon new debt or sold a fixed asset to generate additional funds. So, in the cash flow statement example above, the amount of debt/money generated is $219,000.

Accounts Receivable:

Accounts receivable are funds a business is owed for delivering a product or service (Harvard Business School).

An increase in accounts receivable means that the company owes more money. The increase also means that less cash is flowing into the business. That’s why we deduct any increase in accounts receivable from the cash flow statement.

On the other hand, if the accounts receivable decrease between two time periods, the company is receiving actual cash. Hence, the reduction in accounts receivable is added to the cash flow statement.

Inventory:

An increase in inventory means that the company has spent money to buy inventory. That’s why the increase is deducted in the cash flow statement.

In the example above, inventory has increased by $139,000. Hence, this value is deducted from the cash flow statement.

Other Working Capital and other non-cash items

The next item in the cash flow statement is the other working capital. Each item is not written separately to prevent the statement from becoming too long. However, the concept applied is the same as discussed above in the changes in working capital.

Net cash provided by operating activities:

Net cash is an important figure to consider. If it is positive, it indicates that the company is generating cash from its operations. A negative net cash provided by operating activities suggests that the company is losing money and not producing profit.

Cash Flows from Investing Activities

This is the second section of the cash flow statement. It shows cash flows from investing activities.

Investments in property, plant, and equipment

The line shows PPE investment. This could be anything from offices to machinery to vehicles. These are important assets for carrying out the company’s operations (Harvard Business School).

In the example above, there is a negative figure of $4936,000. This means Oceanaides Intl. spent $ 4,936,000 on property, plant, and equipment.

Sometimes, the company purchases PPE but does not make the full payment at once. When this happens, only the amount paid in cash is recorded in the cash flow statement.

Acquisitions

This is the amount the company spent on acquiring another business. It is also an important figure to read in cash flow statements, especially for investors, as it tells us how much the company is investing in other businesses.

Comparing this amount to the company’s investment in PPE tells us how much more or less the company is investing in its own business than in other industries.

Why is this important for investors? 

It can be a red flag if the acquisition amount is unusually high compared to PPE investments. This indicates that the company is investing more in other businesses than its own. Hence, investors may also not consider investing in it.

In the example above, Oceanaides Intl. spent $4563000 on investment activities in 2025.

Cash Flows from Financing Activities

The company finances its activities with either debt or equity. This section shows how the company is funding its activities.

Debt Repayment

As the name suggests, this is the amount the company has repaid its debts (Paro AI).

Dividends paid:

This is the amount that the company has paid to the shareholders. In the example above, the company has spent $980,000.

Other financing activities refer to the company’s money raised through issuing new debt. In the example above, Oceanaides Intl has raised $1697,000 in debt.

The subtotal shows the net cash used by (or provided by) financing activities.

The net change in cash:

After calculating the net cash from financing activities, the net change in cash is calculated as follows: 

Net cash provided by operations +/- net cash used for investing activities +/- net cash used by financing activities 

8425,000- 4563,000- 2880,000= $982,000

Net change in cash + Cash at the beginning of the period and cash at the end.

How to Interpret A Cash Flow Statement

Interpreting a company’s cash flow statement involves analyzing costs from each activity: operating, investing, and financing. Start by looking at the net cash inflow/outflow from each activity (Paro AI).

Generally, if the company generates positive net cash flow from each activity, it indicates that it is performing well.

Don’t stress (yet!) because of a negative cash flow. A negative cash flow from any activity does not necessarily indicate a bad sign. Interpret the numbers more closely to find the reason behind them.

We discuss the factors contributing to negative cash flow in companies later in this guide.

What Does Cash from Operations Tell You?

Cash generated from operating activities shows how much cash the business earns (or loses) from its core operations. This figure does not consider one-off items such as the sale of machinery or raising money through debt.

Net cash flow from operating activities is one of the key figures to address in the cash flow statement. Why? Because it is the cash profit from operations. To judge the quality of your company’s profit, compare the cash generated from operations to the profit from operations in the income statement. The lesser the difference between these two, the better the quality of profit.

If, for example, the profit from operations in the income statement (statement of profit or loss) is very high compared to the cash generated from operations, the company cannot turn that profit into cash. This can lead to problems with the company’s short-term liquidity, potentially causing it to default on short-term debts (such as accounts payable).

Examining the Movements in Working Capital

One should particularly examine the movements in working capital if:

• you notice a large difference between the cash generated from operations and the profit in the income statement, or
• if the cash generated from operations is negative (Paro AI).

Here are some reasons that may have led to this figure:

Large increases in receivables and inventories

On the other hand, occasional fluctuations in receivables and inventories are normal for businesses. However, a consistent and substantial increase in these items on the cash flow statement may signal underlying problems. There can be problems, such as the chance of irrecoverable debts.

Whatever the reasons, the company must have sufficient cash to meet its short-term debt obligations on time.

Large increases in payables

Sometimes, a company might show positive cash generated from its operations. However, a closer look at the payable figure between two time periods may show a large increase. This indicates that the company might delay paying its suppliers to improve its cash flow position at year-end.

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What Does a Positive Cash Flow from Operations Mean?

Except in certain circumstances*, it is important that a company shows positive cash flow from its operations. A positive cash flow from operations means the business has sufficient cash to cover its day-to-day expenses. For example, this means the business has enough money to pay its interest payments, taxes, and payables to suppliers without taking on extra debt, selling assets, or issuing shares.

Free Cash

Free cash is the money left over from operations after the company has paid its taxes and interest. Examining how the company spends its free cash is important.

Uses of Free Cash

If a company has sufficient free cash, dividends can be paid. This is much better than relying on longer-term sources of finance to pay dividends to shareholders.

-Investments in noncurrent assets can be paid using free cash. Investing in them will generate returns for the company in the future.

-Loans can be paid back to reduce the interest payments in the future.

Factors Contributing to Negative Cash Flow in Companies

Negative cash flow indicates that the company is spending more than it earns, but it does not necessarily indicate an underlying issue.

Nevertheless, it’s important to acknowledge that profitability isn’t guaranteed every month. Even renowned and successful corporations encounter challenges in consistently maintaining profitability (Paro AI).

Certain companies may incur losses and exhibit negative cash flow as part of their strategy to enhance future profits. Regardless of your business’s size, encountering periods of negative cash flow is common.

A thorough examination of the cash flow statement can help identify the cause of a negative cash flow. 

During the growth phase, companies, such as startups or SMEs, might invest more in assets, sales, and marketing functions. For example, a company might have invested hugely in a noncurrent asset, which may show as a drain on cash flows. However, this suggests the company may generate more cash flow from its assets in the future. In this case, a negative cash flow is usually temporary (not a bad sign).

However, negative cash flow can also be a sign of concern. For example, it can be due to high overhead costs, large amounts of irrecoverable debt, or poor financial planning. These issues can affect the company’s performance and ability to cover its daily expenses in the long run.

Ensure Cash Adequacy for Operational And Strategic Needs

Companies that fail to accurately project cash flow risk falling into a liquidity trap—a state of operational burnout that can render even a profitable company cashless.

A company needs to know how to read and interpret its cash flow statement because it provides vital insights into its financial health, liquidity, and operational efficiency.

If you are ready to enhance your cash management, let Expertise Accelerated professionals help you. Our global talent pool experts can generate cash flow projections for your business with high accuracy, allowing you to cruise through periods of turbulence with confidence and relative stability.

EA’s unique staff augmentation and outsourcing methodologies deploy high-quality and trained FP&A professionals to accurately prepare cash flow projections, preventing a cash drought within the client company.

Similarly, EA can provide the same service if you need cash-flow projections for a small-business plan.