What is a cash flow statement?
The income statement says how much profit the company made; the cash flow statement says how much cash actually came in and went out. They are not the same, because accounting rules count credit sales as income, and count depreciation on machinery as a cost even though no money left that year.
Cash flows are shown in three parts: operating (from running the core business), investing (buying and selling factories, machinery or other investments), and financing (taking or repaying loans, issuing shares, paying dividends). The three added together give how much cash rose or fell over the year.
Say Nasrin’s online clothes shop sells Tk 1,00,000 of dresses in a month, with Tk 20,000 profit after costs. But half the sales were cash on delivery, and the courier has not paid her yet. The books show Tk 20,000 profit, yet at month end she lacks the cash to pay her fabric supplier. That gap between profit and cash is exactly what the cash flow statement catches. The numbers are only an example.
Why it matters to an investor
- To test the quality of profit: a company that reports profit year after year while its operating cash flow is low or negative deserves questions.
- To see where dividends come from: the business’s cash earnings, or new borrowing.
- To judge staying power: even a profitable company can get into trouble if it runs out of cash and cannot pay wages or instalments.
- In Bangladesh companies publish NOCFPS (net operating cash flow per share) next to EPS every quarter. Putting the two side by side gives a first signal.
What the three parts tell you
- Operating: the most important part. In a healthy business it is usually positive and, over time, roughly in line with or above net profit.
- Investing: usually negative in a growing company, because it is spending on factories and machines. If it is positive, check whether the company is raising cash by selling assets.
- Financing: positive when the company borrows or issues shares, negative when it repays loans or pays dividends. Large positive figures year after year mean the company depends on outside money.
From profit to cash: why the numbers differ
Most companies show operating cash flow using the “indirect” method: start from net profit, add back non-cash costs (such as depreciation), and adjust for changes in working capital. When receivables or inventory rise, cash is tied up, so it is subtracted; when amounts owed to suppliers rise, less cash has gone out, so it is added.
Free cash flow is a popular measure: operating cash flow minus spending on machinery and factories (capex). It is roughly the cash available to repay loans or pay dividends without shrinking the business. It can be normal for it to be negative in a year of big expansion; the worry is when it stays negative for many years.
Worked example
- Say the made-up “Rupsha Foods Limited” has net profit of Tk 45 crore. Add back Tk 30 crore of depreciation (no cash left): Tk 75 crore.
- Receivables rose Tk 15 crore and inventory Tk 10 crore (subtract); amounts owed to suppliers rose Tk 5 crore (add). Operating cash flow = 75 − 15 − 10 + 5 = Tk 55 crore. With 10 crore shares, NOCFPS is Tk 5.50.
- New machinery cost Tk 60 crore (investing −60). A new Tk 20 crore loan came in and Tk 20 crore went out as dividends (financing 0).
Result: cash fell by Tk 5 crore over the year (55 − 60 + 0). Free cash flow was −Tk 5 crore, so this year’s dividend was in effect paid with the new loan. For one year that may be fine; if it goes on for many years, questions arise. The numbers are only an example.
Common mistakes
- Looking only at EPS, never at NOCFPS or operating cash flow.
- Feeling reassured that cash rose over the year, when the extra money came from new loans.
- Treating a negative investing figure as bad. For a growing company it is often normal.
- Judging by one year’s cash flow. A big purchase or seasonal stock can make one year unusual; several years added together are more reliable.
Profit is an opinion, cash is a fact: check whether the company’s profit turns into cash, year after year.