Accounting glossary
Cash flow statement
A cash flow statement shows how cash came into and went out of your business over a period, split into operating, investing and financing activities. It explains why your bank balance changed, and why a profitable business can still run short of cash.
Why it matters to your business
Many growing businesses in India show a healthy profit and still struggle to pay salaries and GST on time. The reason is almost always working capital: money locked in customer dues and stock. The cash flow statement shows exactly where the cash went, so you can see whether the problem is slow collections, too much stock, a large equipment purchase or loan repayments.
How it works
The indirect method starts from net profit and adjusts it. For a year:
| Amount | |
|---|---|
| Net profit | ₹8,00,000 |
| Add depreciation (no cash paid) | ₹1,00,000 |
| Less increase in customer dues | (₹6,00,000) |
| Less increase in stock | (₹2,00,000) |
| Add increase in amounts owed to vendors | ₹1,50,000 |
| Cash from operating activities | ₹2,50,000 |
| New machine (investing) | (₹4,00,000) |
| Bank loan taken (financing) | ₹3,00,000 |
| Drawings by the owner (financing) | (₹1,00,000) |
| Net increase in cash and bank | ₹50,000 |
The business earned ₹8,00,000, but ₹6,00,000 of it is still with customers. The machine was paid for mostly by the new loan. Faster collections would have done more for cash than any cost cut.
Common mistakes
- Reading profit as cash. Plan salaries, GST and loan repayments from expected cash, not from profit.
- Buying equipment from working capital. Paying for long-term assets from the money meant for stock and dues squeezes day-to-day operations; match long-term assets with long-term funding.
- Ignoring the timing of GST and TDS. Tax you collect or deduct is due to the government on fixed dates, whether or not your customer has paid you.
- Looking once a year. A monthly view of cash in and out shows a squeeze months before the annual statement does.
Questions about Cash flow statement
What is the difference between profit and cash flow?
Profit counts sales and expenses when they are earned or incurred. Cash flow counts money when it actually moves. A sale made on 60 days' credit adds to profit today and to cash only when the customer pays.
What are the direct and indirect methods?
The direct method lists cash received from customers and paid to vendors and staff. The indirect method starts from net profit and adjusts for non-cash items such as depreciation and for changes in receivables, stock and payables. The indirect method is the more common one in practice.
Is a cash flow statement compulsory?
For companies it is part of the financial statements under the Companies Act, 2013, except for one person companies, small companies and dormant companies. Proprietorships and partnership firms are not required to prepare one, but banks often ask for cash flow figures and projections when you apply for a loan.
What does negative cash flow from operations mean?
Your day-to-day business used more cash than it brought in during the period, usually because customer dues or stock grew faster than sales. It is a warning sign if it continues for several periods.
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