Why do some companies report strong profits yet still struggle to meet payroll or repay lenders? The reason lies in a fundamental accounting distinction: profit does not equal cash. Many businesses appear healthy on paper but operate with dangerously low liquidity.
The cash flow statement eliminates this ambiguity by revealing the true movement of money within a business. Whether you’re analysing stocks, running a company, or managing your trading account on platforms like Ultima Markets, understanding cash flow dynamics is essential.
This guide breaks down how a cash flow statement works, why it matters, and how to evaluate it with confidence.
What Is a Cash Flow Statement?
A cash flow statement—or “statement of cash flows”—summarises all the cash entering and leaving a company during a specific reporting period. Rather than using accrual accounting (which includes non-cash items), this report focuses exclusively on real cash transactions.
Think of it as the financial equivalent of a bank statement: it tracks where the money originated and how it was used. Due to its clarity, it’s one of the most accurate indicators of liquidity, operational strength, and financial resilience.
Why the Cash Flow Statement Matters
Each financial statement provides unique insights, but the cash flow statement helps answer crucial questions that other reports cannot:
For Investors
- Does the company generate enough cash to sustain operations?
- Can it pay dividends, repurchase shares, or expand organically?
For Lenders
- Does the business produce sufficient cash to meet debt obligations?
For Management
- Can the company cover expenses, payroll, taxes, and future investment?
For Anyone Checking Earnings Quality
- Are reported profits genuinely backed by cash, or are they inflated by non-cash adjustments?
How Cash Flow Fits with the Income Statement and Balance Sheet
Understanding all three major financial statements together gives a complete view of a business:
| Statement | What It Reveals | Basis | Time Reference |
| Cash Flow Statement | Actual cash inflows and outflows from operations, investments, financing | Cash | Over a period |
| Income Statement | Revenue, expenses, and net profit | Accrual | Over a period |
| Balance Sheet | Assets, liabilities, equity | Accrual | At a single point |
In short:
- Income Statement: “Did the company earn a profit?”
- Balance Sheet: “What does the company own and owe?”
- Cash Flow Statement: “Does the company have enough cash to survive?”
The Three Pillars of a Cash Flow Statement
A cash flow statement is divided into three key sections, each telling a different part of the financial story.
1. Cash Flow from Operating Activities (CFO)
This is the heartbeat of any business. It reflects the real cash produced by everyday operations.
Common inflows include:
- Cash collected from customers
- Interest or dividend income
Common outflows include:
- Supplier payments
- Employee wages
- Tax payments
A healthy company typically reports positive and growing CFO, showing its core activities are generating cash.
2. Cash Flow from Investing Activities (CFI)
This section captures how the company deploys cash to acquire or dispose of long-term assets.
Typical inflows:
- Selling equipment, properties, or investments
- Collecting loan repayments from third parties
Typical outflows:
- Purchasing PP&E (capital expenditures)
- Acquiring other businesses
- Making loans or long-term investments
High-growth companies generally show negative CFI because they reinvest heavily in future expansion—often a positive sign.
3. Cash Flow from Financing Activities (CFF)
This section highlights how the company raises capital—or distributes it.
Inflows may include:
- Issuing shares
- Borrowing through loans or bonds
Outflows include:
- Repaying debt
- Dividends and share buybacks
A startup might show positive CFF due to fundraising, whereas a mature corporation often shows negative CFF as it rewards shareholders.
How to Analyse a Cash Flow Statement Effectively
Understanding the numbers is useful, but interpreting them is what provides meaningful insight.
Start with the Net Change in Cash
At the bottom of the statement, you’ll find the total increase or decrease in cash for the period.
Ask yourself:
- Is cash growing over multiple years?
- Are declines temporary or part of a worrying pattern?
Trends matter more than isolated figures.
Calculate Free Cash Flow (FCF)
One of the most valued metrics by analysts and investors is Free Cash Flow, because it measures true financial flexibility.
Formula:
FCF = Operating Cash Flow – Capital Expenditures
Positive FCF means the business can:
- Reduce debt
- Pay dividends
- Make acquisitions
- Reinvest without relying on borrowing
Companies with strong, rising FCF are often high-quality long-term investments.
Warning Signs in Cash Flow Statements
Certain patterns can signal financial weakness—even when profits appear strong:
1. Negative Operating Cash Flow Over Several Years
This indicates the business model may be failing.
2. Growing Profits but Shrinking CFO
Suggests aggressive accounting or poor cash collection.
3. Financing Used to Cover Operational Losses
Borrowing to stay afloat is not sustainable.
4. Asset Sales Boosting CFI
A company selling properties or equipment regularly to generate cash is likely in trouble.
Cash Flow Management for Traders
Cash flow principles extend beyond corporate finance—they’re directly relevant to personal trading accounts.
Whether using Ultima Markets MT5 or analysing your account statements, the same rules apply.
Trading “Cash Flow” Example
- Operating Cash Flow: Profits (or losses) from closed trades
- Financing Cash Flow: Your deposits and withdrawals
- Investing Cash Flow: Buying new tools, data subscriptions, or education
Effective traders maintain positive operating cash flow and avoid unnecessary withdrawals that deplete trading capital.
Broker Reliability Matters
When managing trading funds, two factors are crucial:
1. Safe and Transparent Fund Handling
Check the fund protection structure offered by your broker. Platforms like
Ultima Markets fund safety provides clear information on client account segregation, regulatory oversight, and operational risk control.
2. Smooth Deposit and Withdrawal Processes
Inefficient money movement can disrupt your trading strategy.You can learn about procedures here via Ultima Markets Deposits & Withdrawals
3. Trader Feedback
Before choosing a broker, always review user experiences.See what traders say via Ultima Markets Reviews.Good trading performance relies on stable operational cash flow—and that includes the reliability of your broker.
Conclusion
A cash flow statement is far more than a financial appendix—it’s a powerful diagnostic tool that reveals the true liquidity, resilience, and financial direction of a company. It bypasses the potential distortions of accrual accounting and shows how effectively a business manages cash, its most essential resource.
Whether you’re evaluating a public company, managing a private business, or maintaining your trading capital on platforms like Ultima Markets, mastering cash flow analysis will dramatically improve your financial decision-making and long-term success.
FAQ
Q: What are the three key sections of a cash flow statement?
- Operating Activities – Cash generated from daily business operations.
- Investing Activities – Cash used for acquiring or selling long-term assets.
- Financing Activities – Cash flows related to funding and capital structure.
Q: Why is the cash flow statement important?
It reveals whether the company can generate cash, meet obligations, reinvest, and remain solvent—offering a realistic picture beyond accounting profits.
Q: Is negative cash flow always bad?
Not always.
- Negative CFO is concerning.
- Negative CFI often signals growth investment.
Context determines whether the number is positive or alarming.
Q: Can a company be profitable but still run out of cash?
Yes. Profit is an accounting measure; cash is required to operate. Cash shortages can cause even profitable companies to fail.
Q: What’s an example of operating cash flow?
Cash collected from customers for sales is a typical inflow. Paying suppliers or salaries are examples of operating outflows.
