Cash flow statement

The statement explaining how the bank balance moved over a period, split into cash from operating the business, cash spent on or received from long-term assets, and cash raised from or returned to lenders and owners.

Example

Northgate generated 225,000 from operations, spent 400,000 on equipment and repaid 100,000, so cash fell 275,000 from 320,000 to 45,000.

Important

The closing figure is a bank balance somebody can confirm, which constrains this statement in a way the other two are not constrained. Any persistent disagreement with reported profit is the most interesting fact in the accounts.

Related terms

• Operating cash flow — The cash a business generated or consumed by running itself, usually presented as net profit adjusted for non-cash charges and for the movements in receivables, inventory and payables.
• Free cash flow — Operating cash flow less capital expenditure - what is left after the business has funded both its trading and the assets it needs to keep running.
• Quality of earnings — How reliably reported profit turns into actual cash, most simply measured as operating cash flow divided by net profit.

Lessons that explain it

• The cash flow statement: what actually moved — The statement that cannot be authored the way the other two can, because at the end of it there is a bank balance that either matches or does not. It is where a profitable year reveals whether it was also a solvent one. (12 min)
• What the three say together — Each statement answers a question the others cannot, and the interesting information is almost always in the disagreements between them rather than in any single figure. (14 min)
• The return is discretionary earnings, financed with debt the business itself has to service — Seller's discretionary earnings is a reconstructed number built from add-backs, and almost every small-business purchase is financed with debt the business's own cash flow is expected to repay - which makes the add-back schedule the single most consequential piece of arithmetic in the deal. (12 min)

All 578 terms in the Investing glossary