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Lesson 3 of 4Financial Statements

Cash Flow Statement

Profit tells you if your business is viable. Cash flow tells you if it will survive. Many profitable businesses fail because they run out of cash. The cash flow statement tracks every rupee, dollar, or euro moving in and out of your business.

Profit vs Cash Flow — Why Both Matter

"Revenue is vanity, profit is sanity, but cash is king."

— Common business saying

Profitable but Cash-Poor (Dangerous)

You sold ₹10L of goods on credit. P&L shows ₹10L revenue. But customers haven't paid yet. You have ₹0 cash to pay rent and salaries next week.

Cash-Rich but Loss-Making (Temporary)

You received ₹20L in advance from a customer. Cash looks great. But you haven't delivered yet — this isn't revenue. You also owe suppliers ₹15L.

The Three Activities

1. Operating Activities

Cash from day-to-day business operations — selling products, paying suppliers, employee salaries, rent, taxes.

Cash Inflows (+)

  • Cash received from customers
  • Interest received
  • Tax refunds

Cash Outflows (−)

  • Payments to suppliers
  • Employee salaries
  • Rent & utilities
  • Tax payments

2. Investing Activities

Cash spent on or received from long-term assets — buying equipment, selling property, making investments.

Cash Inflows (+)

  • Sale of property or equipment
  • Sale of investments
  • Dividends from investments

Cash Outflows (−)

  • Purchase of equipment/machinery
  • Purchase of property
  • Buying investments/securities

3. Financing Activities

Cash from borrowing, repaying debt, or equity transactions — loans, owner contributions, dividends.

Cash Inflows (+)

  • Bank loans received
  • Owner capital injection
  • Share issuance proceeds

Cash Outflows (−)

  • Loan repayments
  • Dividend payments
  • Share buybacks

Sample Cash Flow Statement (Indirect Method)

"ABC Trading Co." — For the year ended March 31, 2026:

ParticularsAmount (₹)
A. Operating Activities
Net Profit4,05,000
Add: Depreciation1,00,000
Less: Increase in Receivables(50,000)
Less: Increase in Inventory(1,00,000)
Add: Increase in Payables75,000
Net Cash from Operations4,30,000
B. Investing Activities
Purchase of Equipment(2,00,000)
Net Cash from Investing(2,00,000)
C. Financing Activities
Loan Repayment(1,00,000)
Dividends Paid(50,000)
Net Cash from Financing(1,50,000)
Net Change in Cash (A+B+C)80,000
Opening Cash Balance4,20,000
Closing Cash Balance5,00,000 ✓
Verification:The closing cash balance (₹5,00,000) must match the Cash & Bank figure on the Balance Sheet. This is how the three statements connect.

Key Takeaways

Cash flow ≠ profit. A profitable business can fail if it runs out of cash (receivables not collected, inventory piled up)

Three sections: Operating (core business), Investing (long-term assets), Financing (debt & equity)

Positive operating cash flow is the most important signal — it means the core business generates cash

Free Cash Flow = Operating Cash Flow − Capital Expenditure. This is what's truly available for growth

The closing cash balance must match the cash figure on the balance sheet — this is how statements interconnect