The three sections of a cash flow statement
A statutory cash flow statement is divided into three sections, each covering a different source and use of cash.
- Operating activities: cash generated from or used in the core trading operations of the business
- Investing activities: cash spent on or received from capital expenditure, acquisitions, and asset disposals
- Financing activities: cash from or repaid to shareholders and lenders (share issues, loan drawdowns, dividends, loan repayments)
Operating cash flow vs profit
The operating section of the cash flow statement reconciles net profit to operating cash flow by adjusting for non-cash items (depreciation, amortisation) and movements in working capital (changes in debtors, stock and creditors).
A business can be profitable but have negative operating cash flow if its working capital is growing rapidly. This is common in fast-growing businesses and is a key reason why lenders look at cash flow alongside profitability.
Why lenders read cash flow statements
When assessing a finance application, lenders use the cash flow statement to understand how effectively the business is converting profit into cash. A business with consistently strong operating cash flow relative to profit is demonstrating tight working capital management. Weak or negative operating cash flow relative to reported profit raises questions about cash conversion quality.
Frequently Asked Questions
Is a cash flow statement the same as a cash flow forecast?
No. A cash flow statement is a historical record, forming part of statutory accounts. A cash flow forecast is a forward-looking projection of expected cash movements. Both are important for different reasons.
Do all UK companies have to prepare a cash flow statement?
Companies classified as small under the Companies Act (meeting at least two of: turnover below £10.2m, balance sheet below £5.1m, fewer than 50 employees) are generally exempt from filing a cash flow statement as part of abbreviated accounts. However, lenders will typically request one as part of a finance application.