How to build a cash flow statement
Profit is not cash. The cash flow statement bridges the two - here is how to build it the indirect way, from net income to the change in cash.
Why the cash flow statement matters
A profitable business can still run out of cash if it is tying money up in receivables and inventory. The cash flow statement explains the gap between net income and the change in your bank balance, grouped into operating, investing, and financing activities so you can see where cash actually came from and went.
The three sections
| Section | Captures | Examples |
|---|---|---|
| Operating | Cash from core business | Net income, working-capital changes, depreciation add-back |
| Investing | Buying and selling long-term assets | Equipment purchases, acquisitions |
| Financing | Raising and returning capital | Loans, equity raises, debt repayment |
The indirect method, step by step
- 1Start with net income from the income statement.
- 2Add back non-cash expenses such as depreciation and amortization.
- 3Adjust for working-capital changes - a rise in receivables uses cash, a rise in payables provides it.
- 4That gives cash flow from operations.
- 5Add investing activities such as equipment purchases, then financing activities such as loans or raises.
- 6The total change in cash should tie to the movement in your bank balance for the period.
How Fintra builds it
- The cash flow statement builds straight from the same ledger you close against.
- Working-capital movements flow from AR, AP, and inventory automatically.
- The statement ties to the live bank balance, so the change in cash is verifiable.
- Cash flow projection extends the historical statement into a forward forecast.
Frequently asked questions
What is the difference between the direct and indirect method?
The indirect method starts from net income and adjusts for non-cash items and working-capital changes to arrive at operating cash flow. The direct method lists actual cash receipts and payments. The indirect method is far more common because it reconciles directly from the income statement.
Why is net income different from cash flow?
Because accrual accounting records revenue and expenses when earned or incurred, not when cash moves. Non-cash items like depreciation, and changes in receivables, payables, and inventory, all create gaps between profit and cash. The cash flow statement exists specifically to bridge that gap.
What are the three sections of a cash flow statement?
Operating activities cover cash from the core business, including working-capital changes. Investing activities cover buying and selling long-term assets like equipment. Financing activities cover raising and returning capital - loans, equity raises, and debt repayment. Together they explain the total change in cash.
How do working-capital changes affect cash flow?
An increase in receivables or inventory ties up cash and reduces operating cash flow; an increase in payables holds onto cash and increases it. This is why a growing, profitable business can be cash-tight - growth often means funding more receivables and inventory before the cash comes back.
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