Cash Flow Statement

The Three Sections

Operating cash flow: Cash generated or used by the core business — net income adjusted for non-cash items (depreciation, amortization) and changes in working capital (receivables, payables, inventory). This is the most important section for buyers.

Investing cash flow: Cash used for capital expenditures (buying equipment, vehicles, property), proceeds from asset sales, and acquisition activity. Negative investing cash flow is normal for a growing business reinvesting in assets.

Financing cash flow: Cash from borrowing (loan proceeds) or to repay debt, and owner distributions. Large owner distributions in investing cash flow reveal how much the owner extracted from the business.

Cash Flow vs. Net Income

A business can show strong net income and negative operating cash flow — or weak net income and strong cash flow — depending on working capital dynamics and accounting choices. A business that invoices large amounts but collects slowly may be profitable on paper but cash-constrained in practice.

For acquisitions, buyers should reconcile: Net Income → Operating Cash Flow → Free Cash Flow

Large discrepancies between net income and operating cash flow require explanation.

Finding the Cash Flow Statement in SMB Due Diligence

Many small businesses don't have formal cash flow statements — tax returns and P&Ls are the primary financial documents. The practical substitute is bank statement analysis: 12-24 months of bank statements trace actual cash movement and often reveal more than any formal financial statement.