Level 6 · Financial Analysis
Cash Flow
Profit is an opinion. Cash is a fact.
In this lesson
What you'll be able to do
- Explain the three sections of the cash flow statement
- Compare operating cash flow with net profit
- Understand why profit and cash differ
- Spot cash flow warning signs
Think about it
A company reports ₹100 crore profit and cannot pay its suppliers. Where did the money go?
Story
Let's picture it
A furniture maker sells ₹50 lakh of sofas to a hotel chain on 180-day credit. Accounting rules say the sale happened, so profit is recorded today. But the cash arrives six months later, while the carpenter, the fabric supplier and the electricity board all want paying this month. The books look great, the bank account does not.
Visual
The three cash flows
Operating (CFO)
Cash generated by the actual business. Should be positive and growing.
Investing (CFI)
Cash spent on assets or received from selling them. Usually negative in a growing firm.
Financing (CFF)
Loans raised or repaid, dividends paid, shares issued.
Net change
The three added together explain the movement in the bank balance.
Plain English
The simple explanation
The cash flow statement is the least manipulable of the three financial statements because cash either moved or it didn't.
Compare operating cash flow with net profit every year. Over five years, cumulative operating cash flow should be broadly in line with cumulative net profit. A persistent shortfall means profits are not converting into money.
Working capital is the usual culprit. Rising receivables mean customers are not paying; rising inventory means goods are not selling. Both consume cash while profit looks fine.
Real world
Reliance Industries
Reliance generates very large operating cash flows from its refining and retail operations, which it then deploys into heavy capital expenditure visible in the investing section. Reading the three sections together shows how a conglomerate funds its next growth engine.
Watch out
Common mistakes
- Reading only the P&L.
- Ignoring rising receivables and inventory.
- Treating one bad cash flow year as a crisis without checking the trend.
Did you know?
The cash flow statement became mandatory for Indian listed companies precisely because profit figures alone had proved too easy to dress up.
Your turn
Mini challenge
Compare five years of operating cash flow with five years of net profit for one company. Are they close?
Quick quiz
1 / 5
Wrap up
Summary
The cash flow statement shows what actually happened to money. Compare operating cash flow with profit over five years, persistent gaps are the earliest warning available.
- Three sections: operating, investing, financing
- CFO should track net profit over time
- Working capital explains most gaps
- Cash flow catches problems the P&L hides
Revise