Cash Flow Statement: Complete Guide to Understanding Cash Flows in India

Vikram’s Profitable Bankruptcy

Vikram’s manufacturing company showed ₹2 crore profit every year. Banks loved his P&L. Investors were interested.

Then one day, he couldn’t pay salaries. Or suppliers. He was running out of cash.

“But I’m profitable!” he told his CA.

The CA showed him the cash flow statement:

• Profit: ₹2 crore
• Cash stuck in receivables: ₹5 crore (customers not paying)
• Cash stuck in inventory: ₹3 crore (goods not selling)
• Actual cash generated: Negative ₹1 crore

Profit is an opinion. Cash is a fact.

What is a Cash Flow Statement?

Definition

The Cash Flow Statement shows how cash moved in and out of a business during a period. It explains the change in cash position.

The Basic Logic

Opening Cash + Cash Inflows - Cash Outflows = Closing Cash

Why Cash Flow Matters

Profit vs Cash

Three Sections of Cash Flow Statement

Overview

CFO + CFI + CFF = Net Change in Cash

Cash Flow from Operating Activities (CFO)

What It Includes

Cash generated from core business operations.

Inflows:

• Cash received from customers
• Interest received
• Dividends received (sometimes in CFI)

Outflows:

• Cash paid to suppliers
• Cash paid to employees
• Interest paid (sometimes in CFF)
• Taxes paid

Two Methods

Indirect Method (Most Common in India)

Starts with net profit and adjusts for non-cash items.

Net Profit
(+) Depreciation (non-cash expense)
(+) Interest expense (moved to financing)
(-) Interest income (moved to investing)
(±) Changes in working capital
= Cash from Operations

Direct Method

Shows actual cash receipts and payments. Rarely used in practice.

Working Capital Adjustments

Example: CFO Calculation

Net Profit                                    ₹100
Add: Depreciation                              ₹20
Add: Interest Expense                          ₹10
Less: Increase in Inventory                   (₹15)
Less: Increase in Receivables                 (₹25)
Add: Increase in Payables                      ₹10
────────────────────────────────────────────────────
Cash from Operating Activities                ₹100

Interpretation: ₹100 profit, but only ₹100 cash because working capital absorbed some.

Cash Flow from Investing Activities (CFI)

What It Includes

Cash used for or generated from long-term investments.

Outflows (Negative CFI):

• Purchase of property, plant, equipment
• Purchase of investments
• Acquisition of subsidiaries
• Loans given to others

Inflows (Positive CFI):

• Sale of property, plant, equipment
• Sale of investments
• Interest received (sometimes)
• Dividends received (sometimes)

What CFI Tells You

Example: CFI Analysis

Purchase of Fixed Assets               (₹50)
Sale of Old Machinery                   ₹10
Purchase of Investments                (₹30)
────────────────────────────────────────────
Cash from Investing Activities        (₹70)

Interpretation: Company invested ₹70 in growth (net).

Cash Flow from Financing Activities (CFF)

What It Includes

Cash from or to providers of capital.

Inflows:

• Proceeds from issuing shares
• Proceeds from borrowings
• Other financing inflows

Outflows:

• Repayment of borrowings
• Dividends paid
• Buyback of shares
• Interest paid (sometimes)

What CFF Tells You

Example: CFF Analysis

Proceeds from Term Loan                 ₹30
Repayment of Borrowings               (₹10)
Dividend Paid                         (₹15)
Interest Paid                         (₹10)
────────────────────────────────────────────
Cash from Financing Activities         (₹5)

Complete Cash Flow Statement Example

ABC Ltd. Cash Flow Statement (₹ in Lakhs)

                    Cash Flow Statement
              For the Year Ended 31st March 2024
────────────────────────────────────────────────────────────

A. CASH FLOW FROM OPERATING ACTIVITIES

    Net Profit Before Tax                          200
    Adjustments for:
      Depreciation                                  50
      Interest Expense                              30
      Interest Income                              (10)
      Loss on Sale of Assets                         5
    ────────────────────────────────────────────────────
    Operating Profit Before Working Capital Changes 275
    
    Changes in Working Capital:
      Increase in Inventory                        (30)
      Increase in Receivables                      (40)
      Increase in Payables                          20
    ────────────────────────────────────────────────────
    Cash Generated from Operations                 225
      Income Tax Paid                              (50)
    ────────────────────────────────────────────────────
    Net Cash from Operating Activities             175


B. CASH FLOW FROM INVESTING ACTIVITIES

    Purchase of Fixed Assets                      (100)
    Sale of Fixed Assets                            15
    Purchase of Investments                        (30)
    Interest Received                               10
    ────────────────────────────────────────────────────
    Net Cash from Investing Activities            (105)


C. CASH FLOW FROM FINANCING ACTIVITIES

    Proceeds from Long-term Borrowings              50
    Repayment of Long-term Borrowings             (30)
    Interest Paid                                  (30)
    Dividend Paid                                  (40)
    ────────────────────────────────────────────────────
    Net Cash from Financing Activities             (50)


Net Increase in Cash (A + B + C)                    20
Cash at Beginning of Year                           80
────────────────────────────────────────────────────────────
Cash at End of Year                                100
────────────────────────────────────────────────────────────

Free Cash Flow (FCF)

Definition

Cash available after maintaining/expanding asset base.

Formula

Free Cash Flow = Operating Cash Flow - Capital Expenditure

Or more detailed:

FCF = CFO - Maintenance Capex - Growth Capex

Why FCF Matters

FCF Yield

FCF Yield = Free Cash Flow / Market Cap × 100

Example

Company X:

• CFO: ₹500 crore
• Capex: ₹200 crore
• FCF: ₹300 crore
• Market Cap: ₹5,000 crore
• FCF Yield: 6%

Cash Conversion Cycle

What It Is

Days to convert inventory investment back to cash.

Formula

Cash Conversion Cycle = DIO + DSO - DPO

Where:

• DIO = Days Inventory Outstanding
• DSO = Days Sales Outstanding
• DPO = Days Payables Outstanding

Example

Interpretation

Analyzing Cash Flow Patterns

Healthy Company Pattern

Growth Company Pattern

Distressed Company Pattern

Mature Company Pattern

Cash Flow Red Flags

Warning Signs

Quality Check

CFO / Net Profit ratio (over 3-5 years)

Industry-Specific Cash Flows

IT Services (Infosys, TCS)

Manufacturing (Tata Steel)

Infrastructure (L&T)

FMCG (HUL)

Cash Flow Ratios

Key Ratios

Cash Flow Adequacy

Cash Flow Adequacy = CFO / (Capex + Debt Repayment + Dividends)

Cash Flow vs P&L: Reconciliation

Why They Differ

Reconciliation Example

Net Profit (P&L)                         ₹100 Cr
Add: Depreciation                         ₹20 Cr
Less: Increase in Receivables            (₹30 Cr)
Less: Increase in Inventory              (₹15 Cr)
Add: Increase in Payables                 ₹10 Cr
────────────────────────────────────────────────────
Cash from Operations                      ₹85 Cr

Using Cash Flow for Investment Decisions

What to Check

Comparison Framework

Verdict: Same profit, but Company A has much better cash quality.

Practical Tips

Quick Cash Flow Health Check

1. CFO Positive? Yes → Good
2. CFO > Net Profit? Yes → Quality earnings
3. FCF Positive? Yes → Can fund growth/dividends
4. Debt decreasing or stable? Yes → Not overleveraged
5. Dividends covered by FCF? Yes → Sustainable dividend

Where to Find Cash Flow Statements

Common Mistakes

Mistake 1: Ignoring Cash Flow

Problem: Only looking at P&L Reality: Profitable companies can go bankrupt without cash

Mistake 2: Confusing CFO with Net Profit

Problem: Using them interchangeably Reality: Very different—cash vs accounting profit

Mistake 3: Celebrating Positive CFI

Problem: “Company generated cash from investments!” Reality: Often means selling assets—could be distress

Mistake 4: Ignoring Working Capital Changes

Problem: Not analyzing why CFO differs from profit Reality: Working capital can trap huge amounts of cash

Action Items

For Investors

• Check CFO vs Net Profit for last 5 years
• Calculate Free Cash Flow
• Analyze cash conversion cycle
• Compare with industry peers
• Read cash flow notes in annual report

For Business Owners

• Monitor weekly cash position
• Track receivables aging
• Optimize inventory levels
• Negotiate better payment terms
• Build cash buffer

Disclaimer

This guide is for educational purposes. Cash flow analysis should be combined with P&L and balance sheet analysis. Historical cash flows don’t guarantee future performance. Consult a qualified professional for investment decisions.

Summary

The Cash Flow Statement shows:

1. Operating Cash Flow: Real cash from business
2. Investing Cash Flow: Capital deployed for growth
3. Financing Cash Flow: Capital raised/returned
4. Free Cash Flow: Cash available for distribution
5. Cash Quality: Whether profits are real

Remember: Profit is an opinion. Cash is a fact. Master cash flow analysis, and you’ll spot both opportunities and dangers that others miss.

Social Media Posts

LinkedIn: “A company showed ₹2 Cr profit every year. Banks loved it. Then it couldn’t pay salaries. Why? ₹5 Cr stuck in receivables, ₹3 Cr in inventory. Actual cash generated: Negative. Profit is an opinion. Cash is a fact. Always check the cash flow statement. #CashFlow #FinancialAnalysis”

Twitter/X: “Cash Flow Statement 101:

CFO: Cash from daily business (should be +) CFI: Cash for investments (usually -) CFF: Cash from/to capital (depends)

FCF = CFO - Capex

Profit positive + CFO negative = Red flag 🚩

Cash > Profit. Always. #FinancialLiteracy”

Instagram: “Why profitable companies go bankrupt 💸

✅ P&L shows: ₹100 Cr profit ❌ Cash Flow shows: -₹50 Cr operating cash

Where’s the money? 🔴 Stuck with customers (receivables) 🔴 Stuck in inventory 🔴 Paying suppliers faster than collecting

Profit is accounting magic. Cash is reality. 💰

#CashFlowStatement #BusinessTips”