The cash flow statement

The income statement tells you how much you earned; the balance sheet tells you what you own and what you owe. But neither answers the question that keeps an entrepreneur awake: where did the money go? That is what the cash flow statement is for: it shows how liquidity moved during the year, where it came in and where it went out. It is the document that explains why a profitable company can run out of cash, and vice versa.

Why profit is not cash

The income statement is based on the accrual principle: it records revenue and costs when they accrue, not when the money moves. An issued invoice is revenue even if the customer has not yet paid; depreciation is a cost with no cash outflow at all. The result is that profit and the change in liquidity rarely coincide. A company can close in profit and have its account in the red because it has uncollected receivables, a full warehouse or financing instalments to pay. The cash flow statement reconciles these two worlds.

The three cash flow areas

The statement splits flows into three categories, and this is the most useful part to read:

• Operating cash flow: the liquidity generated (or absorbed) by current operations — collections from customers, payments to suppliers, salaries, taxes. It is the most important area: a healthy company must generate cash from its own activity, not from loans or the sale of assets.
• Investing cash flow: outflows for the purchase of fixed assets (machinery, real estate, holdings) and inflows from their sale. A negative flow here is normal during a growth phase: it means the company is investing.
• Financing cash flow: movements with shareholders and lenders — new loans, repayments, capital increases, distribution of dividends.

The sum of the three areas is the net change in liquidity for the year, which reconciles opening cash with closing cash.

Direct and indirect method

Operating cash flow can be presented in two ways. The direct method lists the main collections and payments directly. The indirect method, more widespread, starts from net profit and adjusts it: non-cash costs (depreciation, provisions) are added back and changes in working capital (receivables, inventory, payables) are taken into account. The result is the same; the indirect method has the merit of showing why profit differs from cash flow, which makes it very instructive to read.

When it is mandatory in Switzerland

The Code of Obligations does not impose the cash flow statement on all companies. It is provided for as part of the more extensive presentation of accounts required of large companies, that is, those subject to an ordinary audit (which exceed, in two consecutive financial years, two of the three thresholds: CHF 20 million balance sheet total, CHF 40 million turnover, 250 full-time positions on annual average). For these entities, the annual accounts include, in addition to the balance sheet and income statement, the cash flow statement and the extended notes. SMEs below those thresholds are not required to prepare it — but that does not mean the document is useless for them.

Why it makes sense for SMEs too

Even without a legal obligation, the cash flow statement is one of the most valuable management tools for a small business. It allows you to:

• Understand whether current operations actually generate cash or rely on financing.
• Identify where liquidity stays locked up (slow receivables, excess inventory).
• Assess the sustainability of investments and profit distributions.
• Engage with banks and investors, who read the cash flow before profit.

Building even a simplified version, perhaps quarterly, gives a snapshot of financial health that the income statement alone cannot offer.

How to read it

The quickest reading looks at the combination of the three areas. Positive operating flow, negative investing flow and modest financing is the profile of a healthy company growing on its own strength. Negative operating flow covered by new loans is a warning sign: the business is burning cash and sustaining itself with debt. The statement does not judge on its own, but it points to where to look.

In summary

• The cash flow statement explains where the money went, which profit and the balance sheet do not.
• Three areas: operating, investing, financing.
• Indirect method: starts from profit and shows why it differs from cash.
• Mandatory in Switzerland for large companies subject to an ordinary audit.
• Useful for SMEs too, as a liquidity management tool.

How we help

We prepare the cash flow statement for companies — whether mandatory or for management purposes — and translate it into concrete guidance on liquidity, so you always know where the cash is going and not just how much you earned. Let’s analyse your cash flow.