Module 3 ยท Reading Financial Statements
Profit is an opinion; cash is a fact. Cash flow shows the real money moving in and out.
A company can show accounting profit yet still run out of cash. Cash flow statements track actual money: operating (from the business), investing (buying assets) and financing (borrowing or raising capital).
Operating cash flow is the most important - it shows whether the core business generates real cash. Free cash flow is operating cash minus capital spending, the money available to grow or pay shareholders.
High profit with weak cash flow can be a warning sign of aggressive accounting or poor collection from customers.
Example: Reliance Industries
Reliance spends heavily on new energy and telecom. Investors watch its free cash flow to see whether the big capital spending is translating into real cash generation.
Why is cash flow important even when a company reports profit?
Can you think of a business that looks profitable but might still struggle to pay its bills?