This post is instalment 3/3 of the essential financial statements series.
Cash flow statements show how cash moves in and out of a company over a specific period of time. They can be incredibly insightful tools to understanding the management of a business’s finance and they can be very revealing of a company’s financial health in general.
As an example, I made a cash flow statement for George Law Updates Tech in 2025, a fictional business that sells CPUs.
Cash flow from Operating Activities
| Net income | £120,000,000 |
| Depreciation and Amortisation | £15,000,000 |
| Share based Compensation | £8,000,000 |
| Increase in Accounts Receivables | (£20,000,000) |
| Increase in Inventory | (£10,000,000) |
| Increase in Accounts Payables | £12,000,000 |
| Net Cash from Operating Activities | £125,000,000 |
Cash flow from Financing Activities
| Proceeds from Issuance of Shares | £40,000,000 |
| Repayment of Bank Loan | (£20,000,000) |
| Dividends Paid | (£10,000,000) |
| Net Cash from Financing Activities | (£10,000,000) |
Cash flow from Investing Activities
| Purchase of Equipment | (£30,000,000) |
| Hardware development costs | (£25,000,000) |
| Proceeds from sales of equipment | £5,000,000 |
| Net cash used in Investing Activities | (£50,000,000) |
Net change in Cash = £85,000,000
| Cash at the beginning of the year | £15,000,000 |
| Cash at the end of the year | £100,000,000 |
The most commonly confused terms explained:
Depreciation and Amortisation:
Depreciation = The gradual reduction in the value of tangible assets such as machinery or vehicles or in GLU Tech’s case likely computers and CPUs.
Amortisation = The systematic reduction in the value of intangible assets, usually including patents, trademarks, software, over time. This is very similar to depreciation except that it applies to non-tangible assets and ensures that their costs is allocated fairly across the periods they benefit.
Share based compensation: Payment to employees or executives in the form of company stock or shares, instead of, or additional to cash payment.
What would a lawyer or auditor learn about the company from this cash flow statement?
1. The business is profitable
The business has a positive operating cash flow of £125,000,000 which means that it is bringing in more cash than it is spending on it daily operations, this is an encouraging sign for both lawyers and auditors alike as it demonstrates a practical rather than theoretical profitability.
2. The business is forward thinking
The company spent £50,000,000 in equipment and hardware this year, showing their increasing investment into their future, this is attractive to investors as it increases confidence that they will make a return on their investments and that shareholder value will be maximised.
3. The numbers seem trustworthy
The fact that GLU Tech included their non cash items such as depreciation and share based pay is indicative of an adherence to regulatory conventions and suggests that they have been litigious in their practices. Auditors will double check all the numbers to ensure viability and ensure authenticity.
“Cash flow is the pulse of a company. Without it, profits are meaningless”
Michael Bloomberg
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