Cash Flow Statement

The cash flow statement answers the question the income statement cannot: where did the cash actually go? It bridges accrual profit to cash reality across three sections. Operating activities show cash generated (or consumed) by the core business, including the working-capital swings — growing receivables and inventory consume cash even in profitable quarters. Investing activities capture capital expenditure and acquisitions. Financing activities show borrowings, repayments, and owner distributions.

For credit analysis, operating cash flow is the headline number. A customer that reports profits year after year but negative or near-zero operating cash flow is converting sales into receivables and inventory, not cash — a pattern that eventually breaks and often breaks on the vendors. The classic distress sequence reads clearly here: operating cash flow turns negative, investing stops, and financing shows heavy new borrowing or, worse, owner money going out the door while trade payables stretch.

Two quick checks earn their keep in every review. First, compare cumulative net income to cumulative operating cash flow over three years; persistent large gaps mean earnings quality is poor. Second, look at distributions in the financing section of pass-through entities (S-corps, LLCs). Owners pulling out more than the company earns is one of the most common precursors to trade credit losses in private companies.