BAJAJ BROKING
August 19, 2025
4 mins read
A Cash Flow Statement tracks the actual movement of cash in and out of your business. It covers operations, investing, and financing, helping you see if you generate enough cash, manage working capital, support capital expenditures, and meet current liabilities.
Learning what is Cash Flow Statement, how to prepare Cash Flow Statement, and appreciating its importance is critical for sound financial decisions.
A cash flow statement is part of your financial reports that shows real cash inflows and outflows over a period. Unlike accrual-based income statements, it reveals how much profit turns into cash. It complements the balance sheet by explaining changes in cash balances and reconciling non-cash items, such as depreciation.
By reviewing it, you can monitor working capital, detect liquidity issues, and use financial ratios to compare performance.
The Cash Flow Statement has three core parts:
This segment shows cash generated or used in daily operations—sales receipts, wage payments, rent, taxes, and supplies. Strong operating cash flow indicates sustainable business health, while poor results may point to working capital problems.
This section reflects purchases or sales of long-term assets, such as machinery (capital expenditures), or investments. Large outflows could signal expansion, but if operating cash flow is weak, it may jeopardize liquidity.
This part tracks cash from borrowing, stock issuance, dividends, or debt repayment. It shows how you finance growth—through equity or loans—and helps evaluate the risk from leverage.
The cash flow statement is structured to help you clearly track how cash moves through your business. It is divided into three sections: operating, investing, and financing activities. Each section shows where money is coming from and where it’s going, across short-term operations and long-term growth or funding decisions.
This cash flow statement layout makes it easier to understand whether a company is generating enough cash from its daily operations, how it is investing in assets, and whether it’s borrowing or repaying money. It also gives context to other reports like the income statement and balance sheet, especially when it comes to working capital, current liabilities, and capital expenditures.
Here’s a simplified example of a cash flow statement:
Particulars | Amount (₹) |
Cash Flow from Operating Activities | |
Net Income | 5,50,000 |
Add: Depreciation and Amortisation | 85,000 |
Add: Increase in Current Liabilities | 1,20,000 |
Less: Increase in Current Assets | (1,00,000) |
Net Cash from Operating Activities | 6,55,000 |
Cash Flow from Investing Activities | |
Purchase of Fixed Assets | (3,00,000) |
Sale of Equipment | 1,00,000 |
Net Cash from Investing Activities | (2,00,000) |
Cash Flow from Financing Activities | |
Issue of Shares | 3,50,000 |
Repayment of Bank Loan | (1,50,000) |
Net Cash from Financing Activities | 2,00,000 |
Net Change in Cash | 6,55,000 |
When reviewing the investing activities section, it’s important not to assume that more cash coming in than going out is always a good sign. A negative cash flow from investing often means the company is spending on capital expenditures like equipment or infrastructure—this is usually a sign of future growth, not a weakness.
From a financial perspective, ongoing investments in fixed assets or securities show that a business is focused on long-term strategy. On the flip side, a large or frequent cash inflow from selling assets might raise questions—is the company liquidating assets to manage short-term cash needs? Is it neglecting reinvestment?
So, a balanced view is key. Look beyond the numbers to understand whether the company is building for the future or just freeing up cash in the short term.
Here’s a sample of common entries under investing activities:
Particulars | Amount (₹) |
Purchase of fixed assets | (2,80,000) |
Purchase of marketable and non-marketable securities | (1,20,000) |
Proceeds from sale of fixed assets | 1,50,000 |
Proceeds from sale of marketable and non-marketable securities | 1,00,000 |
Loans advanced | (90,000) |
Loan repayment received | 70,000 |
Insurance proceeds | 25,000 |
You can prepare a Cash Flow Statement using either the direct method or the indirect method. Both methods ultimately report the same net cash flow but differ in how they present the data.
This approach involves listing all actual cash receipts and payments during the reporting period. It gives a transparent view of cash inflows and outflows from operating activities. However, it requires detailed records from cash accounts.
Steps include:
Start with the total cash collected from customers.
Subtract cash paid for operating expenses like wages and taxes.
Add or subtract cash related to investing and financing activities.
Below is a sample Cash Flow Statement for FY 2023–24 using the direct method, based on Company C’s financials:
Particulars | Amount (₹) |
Cash received from customers | 12,00,000 |
Payments for salaries and wages | (4,00,000) |
Taxes paid | (60,000) |
Cash flow from operating activities | 7,40,000 |
Sale of equipment | 3,00,000 |
Purchase of machinery | (5,00,000) |
Cash flow from investing activities | (2,00,000) |
Loan repayment | (2,50,000) |
Proceeds from issuance of shares | 4,00,000 |
Cash flow from financing activities | 1,50,000 |
Net cash flow | 7,90,000 |
Under the indirect method, the starting point is net income from the income statement. Adjustments are then made for:
Non-cash items (like depreciation)
Changes in working capital (current assets and current liabilities)
This method is more commonly used because it aligns with accrual accounting systems and requires less detailed cash tracking.
A cash flow statement helps you understand how money actually moves through a business—not just profits on paper. It reveals whether a company has enough real cash to cover expenses, grow, and repay debts. Here’s how you can use it effectively:
Check liquidity: See if the company can meet short-term liabilities with the cash it has.
Understand cash sources: Identify whether cash comes mainly from core operations or external funding like loans.
Evaluate capital use: Review capital expenditures to assess how efficiently the business is investing in long-term assets.
Spot trends with ratios: Use financial ratios to compare cash performance over time.
Monitor working capital: Notice how changes in current assets and liabilities affect operating cash flow
There are two main ways to prepare a Cash Flow Statement—the direct and indirect method. While both give the same net cash from operations, they differ in how they present the data and the clarity they offer.
Aspect | Direct Method | Indirect Method |
Approach | Lists actual cash receipts and payments | Starts with net income and adjusts for non-cash items |
Transparency | More clarity on cash movement | Less clear on actual transactions |
Accrual Adjustments | Not required | Required |
Ease of Preparation | Complex, needs detailed records | Easier, uses income statement |
Regulatory Use | Preferred by IFRS but rarely applied | Commonly accepted and widely used |
When Used | Cash-heavy businesses | Most companies |
A Cash Flow Statement tells a deeper story about a business’s health than just figures. Recognising patterns—both good and bad—can guide better financial decisions.
Steady and consistently strong operating cash flow
Planned capital expenditures that support long-term growth
Balanced financing through a healthy mix of equity, retained earnings, and manageable debt
Negative or declining operating cash flow over multiple periods
Regular asset sales just to maintain liquidity
Heavy reliance on external borrowing or short-term debt
By spotting these signs early, whether you’re managing a business or evaluating one, you can act with more clarity and control.
The Cash Flow Statement for Company ABC is outlined below for the Fiscal Year Ended 31 March 2024:
Cash Flow Activities | Particulars | Amount (₹) |
Cash Flow from Operations | Net Earnings | 18,00,000 |
Add: Depreciation | 40,000 | |
Add: Decrease in Accounts Receivable | 25,000 | |
Add: Increase in Accounts Payable | 30,000 | |
Add: Increase in Taxes Payable | 5,000 | |
Less: Increase in Inventory | (60,000) | |
Net Cash from Operations | 18,40,000 | |
Cash Flow from Investing Activities | Purchase of Equipment | (7,00,000) |
Net Cash from Investing | (7,00,000) | |
Cash Flow from Financing Activities | Proceeds from Debentures Issued | 50,000 |
Net Cash from Financing | 50,000 | |
Total Net Cash Flow (FY 2023–24) | 11,90,000 |
According to this cash flow statement, the company earned ₹18 lakh in net profit and adjusted it with changes in working capital and non-cash items.
It added ₹1 lakh through adjustments like depreciation and changes in payables/receivables.
₹60,000 was reduced from cash due to increased inventory.
₹7 lakh was spent on buying equipment, a capital expenditure.
₹50,000 was raised by issuing debentures.
The final net cash flow stood at ₹11.9 lakh — a positive sign of healthy liquidity.
Importance of a Cash Flow Statement is outlined below:
Helps maintain ideal cash levels
Reports actual cash spending not shown elsewhere
Aids short-term planning and liability management
Reflects every transaction affecting cash—like working capital or capex
When you consistently review your Cash Flow Statement, you get a clear picture of how your business generates and uses cash. It shows how much of your profit is actual cash and whether your operations can support growth and expenses without relying on outside funding.
Paired with your Balance Sheet and key financial ratios, it helps you make confident, well-informed decisions—by showing exactly where your cash comes from and where it’s going.
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It starts with net income, then adjusts for non-cash expenses (like depreciation) and changes in working capital—such as inventory, receivables, and payables—to calculate the actual cash generated from operations.
It shows how cash moves through a business, helping you assess liquidity, check if the company can meet obligations, and understand how operations, investments, and financing are funded.
This is an expense recorded for accounting purposes without any real cash outflow. Common examples include depreciation and amortisation. They are added back in cash flow calculations to reflect actual cash status.
Adjustments include adding back non-cash charges (e.g., depreciation), removing non-operating gains or losses, and accounting for changes in working capital like receivables, inventory, or payables.
Depreciation reduces accounting profit but doesn’t involve cash. So, it's added back to net income in the operating section under the indirect method to reflect actual cash flow.
The direct method lists actual cash inflows and outflows. The indirect method starts with net income and adjusts it for non-cash items and working capital changes. Both arrive at the same final result.
Because net income includes non-cash items and uses accrual accounting. The cash flow statement adjusts for these to reflect only real cash generated or used during the period.
An increase in current assets (like inventory) means cash went out, while an increase in current liabilities (like payables) means more cash was retained. These adjustments appear under operating activities.
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