The Statement of Cash Flows is the third core financial statement, and for many founders, it is the most important for managing the day-to-day health of the business. While the Income Statement tells you if your business is profitable, the Cash Flow Statement shows how much actual cash is moving in and out of your bank accounts.
This distinction is critical because profit does not equal cash. A profitable company can still run out of money and fail if it doesn't manage its cash flow effectively. This report helps you track your liquidity and ensure you have the cash needed to pay bills, employees, and suppliers.
To view this report in Dappr, navigate to Accounting from the main menu, select Reports and statements, and then click on Cash flow statement in the sub-menu.
Why "cash is king"
Imagine you make a $10,000 sale to a client in January. Under accrual accounting (the standard method used for financial statements), you recognize that revenue in January because that's when you earned it. Your Income Statement for January will show a $10,000 profit from this sale, which looks great. However, if the client's payment terms are 60 days and they don't actually pay you until March, you have zero cash from that sale in January to pay your own bills.
The Cash Flow Statement solves this problem by tracking only the actual cash that has entered or left your possession. It bridges the gap between the accrual accounting of the Income Statement and the cash reality of your bank balance, giving you a true picture of your cash position.
Breaking down the Cash Flow Statement
The statement is organized into three main sections that categorize every cash transaction. This structure helps you understand where your cash is coming from and where it is going.
Operating Activities
This is the most important section for assessing the day-to-day financial health of your business. It includes all the cash generated by or used in your principal revenue-producing activities. Essentially, it shows whether your core business model is generating more cash than it consumes.
Cash from Operating Activities includes:
Cash received from customers: The actual payments you've collected.
Cash paid to suppliers and employees: Payments for inventory, rent, salaries, utilities, etc.
Cash paid for interest and taxes.
This section starts with your Net Income (from the P&L) and then makes adjustments for non-cash items (like depreciation) and changes in working capital. For example, if your Accounts Receivable increased, it means you made sales that you haven't collected cash for yet, so that increase is subtracted from Net Income to get to the true cash flow.
A positive cash flow from operations is a strong sign of a healthy, self-sustaining business. A negative cash flow from operations may indicate that the company is spending more cash than it brings in from sales, which is unsustainable without external funding.
Investing Activities
This section reports the cash used for or generated from the purchase and sale of long-term assets. These are investments made in the company's future growth and infrastructure.
Cash from Investing Activities includes:
Purchase of Property, Plant, and Equipment (PP&E): Cash spent on items like computers, machinery, or vehicles. This is a cash outflow.
Sale of Property, Plant, and Equipment (PP&E): Cash received from selling long-term assets. This is a cash inflow.
Purchase or sale of other business assets: This could include buying or selling intellectual property like patents or trademarks.
For most growing startups, this number will be negative, as they are actively investing in equipment and technology to scale the business. A large cash inflow in this section could mean the company is selling off assets, which might be a sign of downsizing or a strategic shift.
Financing Activities
This section shows the flow of cash between a company and its owners and creditors. It details how the company is raising capital to fund its operations and growth, and how it is returning capital to its backers.
Cash from Financing Activities includes:
Issuing stock or receiving owner investments: Cash coming into the business from owners or venture capital investors. This is a cash inflow.
Distributions to owners or stock buybacks: Cash paid out to the owners of the business. This is a cash outflow.
Borrowing money from a lender: The cash received from a new loan. This is a cash inflow.
Repaying the principal on a loan: The portion of a loan payment that reduces the total debt. This is a cash outflow. (Note: The interest portion of the payment is an operating activity, as it's considered a cost of running the business).
The bottom line: Net change in cash
After detailing the cash flows from these three activities, the statement calculates the Net cash change for the period. This is the sum of the cash flows from operating, investing, and financing activities.
This figure tells you the total increase or decrease in your cash over the period. The statement then adds this net change to the beginning cash balance (your cash on hand at the start of the period) to arrive at the ending cash balance. This final number should match the actual cash balance shown in your bank accounts and on your Balance Sheet for that date, tying all three core financial statements together.
Why is the Cash Flow Statement important?
Manages Liquidity: It is the best tool for assessing your ability to meet short-term obligations. It answers the critical question: "Do we have enough cash to pay our bills next month?" By analyzing past cash flows, you can create a cash flow forecast to predict future needs and potential shortfalls.
Highlights Operational Efficiency: A strong, positive cash flow from operations indicates a healthy, sustainable business model. If this number is consistently negative while your Income Statement shows a profit, it could be a red flag that you are not collecting cash from customers quickly enough or that your inventory is not selling.
Informs Strategic Planning: It shows whether you are generating enough cash internally to fund growth or if you need to seek external financing (a loan or investment). If you plan to make a large purchase, the statement helps you understand if you can afford it without jeopardizing your ability to cover day-to-day expenses.
By regularly reviewing all three financial statements, you gain a complete and multi-dimensional view of your company's performance and position.