Cash Flow Statements
The Big Picture
What the Cash Flow Statement is actually trying to tell you - and why it exists alongside the other financial statements.
Cash flow questions need practice. Book a session to work through past papers with Dineo.
Book Now →Imagine you sell R500 000 worth of goods this month - but all of it is on credit and none of your customers have paid yet. Your Income Statement shows a R500 000 profit. Your bank account shows R0. You cannot pay your staff. You cannot buy more stock. The business could collapse even though it is technically "profitable." The Cash Flow Statement is the document that exposes this problem.
The Cash Flow Statement answers one question: where did the cash come from and where did it go? The Income Statement tells you if the business was profitable. The Balance Sheet tells you what it owns and owes. The Cash Flow Statement tells you whether it actually has money to survive.
The Three Financial Statements - What Each One Does
Why Profit and Cash Are NOT the Same
A company can be profitable and go bankrupt at the same time if it runs out of cash. Investors, banks, and creditors need the Cash Flow Statement to see whether the business can actually keep its doors open - regardless of what the profit figure says.
Think of three bank envelopes. The first tracks money from running the shop day-to-day (operating). The second tracks money spent on big equipment or investments (investing). The third tracks money borrowed or raised from investors (financing). Every rand that moves goes into one of these three envelopes - that is all the Cash Flow Statement is doing.
Operating Activities
Cash from the day-to-day running of the business. The biggest and most complex section.
Paying suppliers
Staff wages
Interest paid
Tax paid
Dividends paid
Investing Activities
Cash spent on or received from long-term assets and investments.
Selling old vehicles
Fixed deposits
Investments in other companies
Financing Activities
Cash raised from or returned to investors and lenders.
Buying back shares
Taking out a loan
Repaying a loan
What Each Section Tells a Reader
This is the most important formatting rule in the entire Cash Flow Statement. Brackets ( ) always mean an outflow - cash leaving the business. No brackets means an inflow. Get this wrong and your entire statement will be incorrect even if every number is right.
Both methods produce EXACTLY the same final cash flow figures. The only difference is WHERE the working from profit to cash is shown - either in a separate note (Method 1) or directly in the statement (Method 2). The numbers and calculations are identical.
Indirect / Note Method
The reconciliation from profit to cash is placed in a separate Note 1. The face of the statement shows only one summarised line for operating activities.
Use when: the question asks you to draw up Note 1 separately, or the format shows a note reference in the operating section.
Direct / On the Face
The full reconciliation from profit to cash is written directly inside the operating section on the face of the statement. No separate Note 1 is needed.
Use when: the question does NOT show a Note 1 reference, or asks for the full statement without separate notes.
What the Reconciliation Actually Does
Depreciation is an accounting adjustment - it reduces profit on paper to reflect the aging of assets. But no cheque is ever written for depreciation. No EFT leaves the bank. It is a non-cash expense. So when we convert profit into actual cash, we have to add depreciation back because the cash was never actually spent.
Stock, debtors and creditors are all places where cash gets "locked up" or "freed up." If you buy a lot more stock this year, that cash is now sitting on your shelves - it left the bank even though no expense appeared in the Income Statement. If your customers owe you more this year than last year, cash that should have arrived did not. These changes must be captured in the Cash Flow Statement.
📦 Inventory (Stock)
Cash used to buy more stock
Less cash tied up in stock
📋 Receivables (Debtors)
Cash not yet collected
More cash collected than billed
🤝 Payables (Creditors)
Kept cash longer (owe more)
Paid off more debts
The Memory Rule
The trade and other payables balance includes things that do NOT belong in working capital changes - SARS income tax (handled in Note 4), shareholders for dividends (handled in Note 3), and bank overdraft (a financing item). Always strip these out before calculating the change in payables. Leaving them in is one of the most common errors in cash flow questions.
| Item | Section | Inflow or Outflow? |
|---|---|---|
| Cash generated from operations | Operating | Could be either |
| Interest paid | Operating | OUTFLOW (brackets) |
| Dividends paid | Operating | OUTFLOW (brackets) |
| Tax paid | Operating | OUTFLOW (brackets) |
| Depreciation | Note 1 only | Added back to profit (not cash) |
| Purchase of fixed assets | Investing | OUTFLOW (brackets) |
| Proceeds from disposal of assets | Investing | INFLOW |
| Increase in fixed deposit | Investing | OUTFLOW (brackets) |
| Decrease in fixed deposit | Investing | INFLOW |
| Proceeds from shares issued | Financing | INFLOW |
| Buy-back of shares | Financing | OUTFLOW (brackets) |
| New loan taken out | Financing | INFLOW |
| Repayment of loan | Financing | OUTFLOW (brackets) |
Three things that trip students up every time
Look at the three section totals. If Operating is positive - the business generates real cash from its work. If Investing is very negative - the business is growing (buying assets). If Financing is positive - the business is raising money from outside. The net change at the bottom tells you if the overall cash position improved or worsened during the year.
The One Insight
Profit tells you if you made money.
Cash flow tells you whether you can survive.
A company with strong cash flow from operations can weather bad years, fund growth, and pay its debts. A company with profit but weak cash flow is one cash crisis away from collapse. That is why the Cash Flow Statement exists and why it is tested.
Ready to work through
the calculations?
Understanding the big picture is step one. Now you need to practise the actual numbers. Book a session with Dineo to work through past exam questions.