This article is number 3 of 3 and is related to the structure of the Cash Flow Statement which forms part of the Financial Statements

In our previous reference article I went through the structure of the Balance Sheet. If you haven’t read that yet you can find it here.

The Cash Flow Statement is the “ugly duckling” of the Financial Statements. Many accountants actually omit it from the report that they provide business owners. Go and check now if that is happening to you. If it is, talk to your accountant and insist they start preparing it. As a business owner there is a key item that it tells you that you must be aware of – solvency. Basically if your business is insolvent then you shouldn’t be trading. If you continue to trade whilst you are insolvent you could get in a lot of trouble. Some people even go to jail for it!!

So, now that I have scared the bejesus out of you, here are the key elements that make up the cashflow statement:

  1. Operating Cash Flow
  2. Investing Cash Flow
  3. Financing Cash Flow

The Total Cash Flow is the sum of these three. The little subtlety of each of these is that they measure the change since the last period.

The three areas represent the different ways you can fund your business

Operating Cash Flow – This is the cash that you generate from the sale of your products and services to your customers when it is received.

Investing Cash Flow – This is the cash that you receive from shareholders as they put money in to the business to buy shares. It could also be derived from the purchase and sale of assets such as shares, and plant & equipment.

Financing Cash Flow – This is the cash that you receive from banks and financiers as they give you loans and you repay them.


The Cash Flow Statement is often omitted because it can be tricky and take a little while to produce. Which means it might end up in the “too hard” basket. There are two ways of calculating – Direct and Indirect. The Direct is always used when formal financial statements are prepared. It involves measuring the movement from opening balance to closing balance of the relevant items. The Indirect method is a bit quicker but is not as accurate. I use it during the year so I can monitor the trend.

So before I go, I know that the key thing you want to know from me is how you use this statement to stay out of jail. Well the key is the “Operating Cash Flow” number. Make sure that this number is greater than or equal to your EBITDA every time you get the financial statements. Why? Well the EBITDA represents your profit before all the “non-cash” items are taken out. It represents the underlying profit you have made from an accrual basis. The Operating Cash Flow number represents the actual cash you collected. If it is higher than your profit, assuming it is not a loss, then you have generated cash which means you will have enough to pay your bills when they fall due. You are solvent. If the cash you are generating is less than your EBITDA then you have a hidden problem. On paper you have made a profit, but in reality, you don’t have the cash to pay your bills. You are insolvent. As a Director of a business you have obligations under law when you are insolvent. If you don’t comply with those, you can become liable, and potentially pay the ultimate price. There are some things you can do, but those can be covered in another post.

I hope these series of posts on the Financial Statement have been useful. They are pretty high level but give you the basics and in future artilcles we can talk about how to use some of this.