How to Read a Cash Flow Statement

Why Cash Flow Matters 

Profit doesn’t always mean cash in the bank. 

A company can show strong earnings while running low on money, or report weak profits while cash pours in.  

The cash flow statement tracks the actual movement of money in and out of the company. 

It reveals whether the business generates cash, whether operational costs and investments consume it, and whether financing fills the gap.  

A cash flow statement answers a simple but crucial question: Is the company bringing in real cash or just accounting profits?

The Three Sections of Cash Flow 

At Momus Partners, Jonah walks Xue through the structure of the cash flow statement. “Think of it in three streams,” he says:  

• Operating activities: cash generated by the core business
• Investing activities: cash spent on equipment and acquisitions or received from selling assets
• Financing activities: cash from borrowing, repaying debt, or issuing shares

“Together, they show where cash comes from and where it goes.”  

Xue sees this as the bridge between the income statement and the balance sheet.

Operating Cash Flow: The Core Engine 

Operating cash flow starts with net income and adjusts for non-cash items like depreciation, plus changes in working capital. It shows whether the firm can fund itself day to day. 

• Depreciation is added back because it reduces profit, but not cash
• Rising inventory uses cash — money spent to replenish stock
• Rising receivables uses cash — sales recorded, but customers haven’t paid yet
• Rising payables frees up cash — the firm hasn’t paid the bills yet, so cash stays in the business longer

Investing Cash Flow: Aiming to Grow

Investing cash flow reflects long-term strategic decisions. 

• Buying equipment or software licenses, acquiring a rival, or building a new factory is an outflow
• Selling assets is an inflow

PrettyBricks’ recent expansion shows up as a large investing cash outflow for new machinery. 

Xue learns that negative investing cash flow isn’t inherently bad. Often, it just means the firm is expanding.  

The key question is whether operations generate enough cash over time to support investments.