‘Cash is king and the cash flow statement is arguably the most important of a company’s three main financial statements. We explain the relationship between profit and cash and how cash management is vital to keep companies in business.’ Paul Hickman, Edison analyst

What is cash flow?

Cash flow is the flow of money coming into and out of a company in a given period, usually a year. Companies manage cash in three main areas: 1) operating; 2) investing; and 3) financing. Operating cash flows reflect a company’s operating activities, from paying cash to produce goods for sale to providing services and receiving cash in return.

Investing involves either acquiring or selling long-term assets, where sales generate cash and acquisitions consume it. Financing refers to the cash flows used to fund the company. For example, a company issuing shares receives cash when the shares have been bought by an investor. Alternatively, a repayment on borrowings is a financing cash outflow.

How do companies report cash flow?

The cash flow statement, one of the three main statements enshrined in statutory financial reports, includes cash inflows and outflows from the company’s operating, investing and financing activities.

The function of the cash flow statement is to report cash movements between one period end and the next. In contrast, the income statement records revenues, costs and profits within the period, and the balance sheet shows assets and liabilities at the period’s end. Defining the differences between the income and cash flow statements is key to appreciating the differences between profit and cash.