A cash flow statement tracks the money that actually moved through your bank account and cash box over a period. Not what you billed, and not what you earned on paper.
It has three sections and two methods. The sections are operating, investing and financing. The two methods, direct and indirect, are only different ways of writing the first of those three sections.
Across the businesses we work with, the owners who get caught out are rarely the ones losing money. They are the ones showing a healthy profit while the bank balance quietly drains. That gap is exactly what this statement exists to expose.
Key Takeaways
- Three sections: operating, investing and financing activities.
- Two methods, direct and indirect, and they change only the operating section.
- Most Indian private companies are now legally exempt from preparing one.
- Banks and lenders ask for it anyway, whatever your legal position is.
The 3 Sections of a Cash Flow Statement
Every rupee that moves gets sorted into one of three buckets. The classification comes from Ind AS 7, and AS 3 uses the same three headings for businesses not on Ind AS.
| Section | What It Captures | Typical Line Items |
|---|---|---|
| Operating activities | Cash from running the business day to day | Customer collections, supplier payments, salaries, GST, income tax |
| Investing activities | Cash spent on or received from long-term assets | Buying machinery or a vehicle, selling old equipment |
| Financing activities | Cash from and to lenders and owners | Loan received, principal repaid, interest paid, capital, drawings |
The order matters more than it looks. Operating comes first for a reason. It answers the question that decides whether a business stands on its own. Does the trade itself throw off cash, or is the business being funded by borrowing and asset sales?
A Pune diagnostic lab chain that funds a bad year by selling an old scanner will show that plainly. Operating negative, investing positive, and no real recovery underneath.
One line trips people more than any other. Interest paid goes in financing, not operating, for any business that is not a bank or a finance company. Ind AS 7 removed the choice that the international standard still allows, so there is no judgement call to make here.
Salaries, rent, electricity and every other operating cost stay in the first section, whatever they are paid for. The test is what the money did, not how large it was.
What Counts as Cash in a Cash Flow Statement
The word covers more than the notes in the drawer, and getting the boundary wrong shifts figures between sections.
Cash means cash in hand and demand deposits with a bank. Cash equivalents are short-term, highly liquid investments. They convert to a known amount of cash and carry very little risk of a change in value.
The usual test is maturity. An investment normally qualifies only if it matures within about three months of the date you acquired it. A 45-day fixed deposit made in February 2026 counts. A three-year deposit does not, and buying one is an investing outflow.
Bank overdrafts are the exception worth knowing, and the answer depends on which standard you follow.
Under Ind AS 7, an overdraft repayable on demand that swings in and out of credit as part of normal cash management sits inside cash and cash equivalents. AS 3 does not carry that treatment, so businesses outside Ind AS show the movement under financing.
Cash Flow Statement Format You Can Copy Into Excel
This is the indirect method layout, which starts from net profit and works back to cash. Copy the left column into a spreadsheet, put your figures in the right, and the structure takes care of itself.
The Indirect Method Layout
| Particulars | Amount (₹) |
|---|---|
| A. Cash Flow From Operating Activities | |
| Net profit before tax | |
| Add: Depreciation and amortisation | |
| Add: Interest expense | |
| Less: Interest or dividend income | |
| Operating profit before working capital changes | |
| Add or less: Movement in trade receivables | |
| Add or less: Movement in inventory | |
| Add or less: Movement in trade payables | |
| Cash generated from operations | |
| Less: Income tax paid | |
| Net cash from operating activities | |
| B. Cash Flow From Investing Activities | |
| Purchase of fixed assets | |
| Sale of fixed assets | |
| Net cash used in investing activities | |
| C. Cash Flow From Financing Activities | |
| Loan taken | |
| Loan principal repaid | |
| Interest paid | |
| Capital introduced, drawings or dividend | |
| Net cash from financing activities | |
| Net increase or decrease in cash (A + B + C) | |
| Add: Opening cash and bank balance | |
| Closing cash and bank balance |
The One Line That Has to Match
The last line is your control check. It has to match the closing bank and cash balance in your books exactly. If it does not, something in the three sections is misclassified or missing.
Our annual financial summary template rolls twelve months of sales, expenses and GST into one view. That gives you most of the source figures the layout above needs.
2 Methods of Preparing Cash Flow Statement
Both methods produce exactly the same operating cash figure. They differ only in how they get there.
| What Changes | Direct Method | Indirect Method |
|---|---|---|
| Starting point | Actual receipts and payments | Net profit before tax |
| How it is built | List gross cash received and paid | Add back non-cash items, then adjust working capital |
| Source data | Bank statement and cash book | Profit and loss account plus two balance sheets |
| Effort | Higher, needs clean transaction-level records | Lower, most accountants prefer it |
| Reader-friendly | Easier for a non-accountant to follow | Harder to read, but standard |
Ind AS 7 encourages the direct method because it shows information the indirect method never surfaces. In practice the indirect method dominates, since it can be assembled from statements a business already has.
Pick the direct method if your billing and banking records are clean enough to pull actual receipts and payments. Pick the indirect method if you are working from a finalised profit and loss report, which is the usual position at year end.
A Worked Example, Start to Finish
The figures below belong to a Surat textile wholesaler running one warehouse and two counters, for the year ended 31 March 2026. It is a partnership firm, so it was under no legal duty to prepare one. The statement was prepared because the bank asked for it during a working capital limit renewal (an example).
The Completed Statement
| Particulars | Amount (₹) |
|---|---|
| A. Operating Activities | |
| Net profit before tax | 18,40,000 |
| Add: Depreciation | 2,60,000 |
| Add: Interest on term loan | 1,15,000 |
| Operating profit before working capital changes | 22,15,000 |
| Less: Increase in trade receivables | (6,80,000) |
| Less: Increase in inventory | (3,45,000) |
| Add: Increase in trade payables | 2,20,000 |
| Cash generated from operations | 14,10,000 |
| Less: Income tax paid | (4,60,000) |
| Net cash from operating activities | 9,50,000 |
| B. Investing Activities | |
| Purchase of delivery van | (7,20,000) |
| Sale of old cutting machine | 85,000 |
| Net cash used in investing activities | (6,35,000) |
| C. Financing Activities | |
| Term loan received | 5,00,000 |
| Loan principal repaid | (2,40,000) |
| Interest paid | (1,15,000) |
| Partners’ drawings | (3,00,000) |
| Net cash from financing activities | (1,55,000) |
| Net increase in cash (A + B + C) | 1,60,000 |
| Add: Opening cash and bank balance | 4,15,000 |
| Closing cash and bank balance | 5,75,000 |
Reading the Result
Read the two ends against each other. The firm earned ₹18,40,000 before tax and its bank balance rose by ₹1,60,000.
The ₹16.8 lakh difference is fully explained inside the statement. Roughly ₹10 lakh went into receivables and stock. Tax took ₹4.6 lakh, the van absorbed ₹7.2 lakh and the partners drew ₹3 lakh. The loan and the machine sale put ₹5.85 lakh back.
That is the whole point of the exercise. The owner who only sees the profit figure concludes the year went well. The owner reading this sees that growth was funded by a term loan while ₹10 lakh sat locked in customers’ hands and unsold stock.
Across the retail and wholesale businesses we work with, receivables are where this gap opens most often. Sales grow, credit terms stretch a little to win the order, and the cash lands a quarter later than the profit did.
How to Read the Three Sections Together
The individual numbers matter less than the combination. Whether each section is positive or negative tells you how the business is being funded, which is the question a lender is really asking.
| Sign Pattern | What the Pattern Usually Means |
|---|---|
| Operating +, Investing −, Financing − | The trade funds its own growth and pays down debt. The healthiest shape |
| Operating +, Investing −, Financing + | Expanding faster than trade alone allows, topped up by borrowing |
| Operating −, Investing +, Financing − | Assets are being sold to cover a shortfall. The one to worry about |
| Operating −, Investing −, Financing + | Early stage or heavy expansion, funded almost entirely by lenders |
Run the Surat example above through this. Operating positive, investing negative, financing negative, which is the first row and a reasonable place to be.
One caution before you read too much into a single year. A single large purchase, such as the delivery van, can flip the investing sign on its own. Read the pattern across three years rather than one.
Cash Flow Statement vs Profit and Loss Account
Profit and cash are two different numbers, and the gap between them is where most working capital trouble hides.
A profit and loss account records a sale the day you raise the invoice. A cash flow statement records it the day the money lands. Say a Surat textile wholesaler bills ₹40 lakh in March on 90-day credit. The profit lands in that financial year. The cash does not.
The same split runs the other way. Repaying loan principal drains real cash but never touches the profit line. Buying stock turns cash into inventory without reducing profit by a rupee.
That is why a business can post a strong year on paper and still miss salaries.
The three statements answer three different questions. Your balance sheet shows what you hold on one date. The profit and loss account shows what you earned over a period, and the cash flow statement explains how the bank balance travelled between the two.
Do You Legally Have to Prepare One?
Probably not, and the answer changed recently.
Section 2(40) of the Companies Act, 2013 says a company’s financial statement includes a cash flow statement. Four categories are carved out: One Person Companies, small companies, dormant companies, and private companies recognised as start-ups.
The carve-out widened on 1 December 2025. MCA notification G.S.R. 880(E) raised the small company thresholds. Paid-up share capital moved from ₹4 crore to ₹10 crore, and turnover from ₹40 crore to ₹100 crore.
| Your Business Type | Cash Flow Statement Required? |
|---|---|
| Private company within ₹10 crore capital and ₹100 crore turnover | No, if it is not a holding or subsidiary company |
| Private company above either threshold | Yes |
| One Person Company or dormant company | No |
| Private company recognised as a start-up | No |
| Proprietorship or partnership firm | No, the Companies Act does not apply |
| Public company | Yes |
A company has to meet both limits, and the small company relief does not extend to a holding or subsidiary company.
That covers the legal question, not the practical one. Term loan applications, working capital limit renewals and due diligence all ask for cash flow. An exempt business that cannot produce one is answering a lender’s question with a shrug.
Where the Numbers Come From in Your Billing Software
You do not build this from scratch every year if your billing and accounting records are already structured.
Three of the hardest figures come straight out of a billing system. The receivables movement comes from your outstanding invoice ageing. The inventory movement comes from opening and closing stock valuation, and the payables movement from unpaid purchase bills.
Petpooja Invoice runs the billing for more than 8,000 businesses, and it holds all three of those figures in one place. Its Tally integration pushes the entries across, so the ledger balances you pull at year end match what your accountant is working from.
The alternative is reconstructing a year of movement from bank statements in April, which is how figures get missed.
5 Mistakes That Make a Cash Flow Statement Wrong
- Treating the whole EMI as one payment. An EMI splits into principal and interest. Both belong in financing, but they have to be disclosed on separate lines, and the interest charged in your profit and loss account gets added back in the operating section first.
- Missing non-cash items on the add-back line. Depreciation is the obvious one. Provisions for doubtful debts and any loss on sale of an asset belong there too. A Nagpur electronics retailer that skips them will understate operating cash every year.
- Netting off instead of showing gross. A new ₹5,00,000 loan and a ₹2,40,000 repayment are two separate lines. Showing ₹2,60,000 as a single net figure hides the borrowing from anyone reading it, which usually includes the person deciding your limit.
- Putting GST paid in the wrong section. GST on operations is an operating outflow, not a financing one.
- Not tying back to the bank balance. If the closing figure does not agree with your books, the statement is wrong somewhere. A trial balance that already tallies makes this check far quicker.
Conclusion
Build the statement even if the law has stopped asking you for it. The 1 December 2025 threshold change removed a filing duty, not the underlying problem it was designed to reveal.
Start with the indirect format above, fill it from your last finalised accounts, and check that the closing line agrees with your bank. If you want the three source figures to arrive already reconciled, Petpooja Invoice keeps receivables, stock and payables in one system all year.
Frequently Asked Questions
No. A cash book is a running record of every receipt and payment as it happens. A cash flow statement summarises a whole period and sorts the movement into three sections. It answers why the balance changed rather than listing what changed it.
Neither is wrong, and both are accepted. The indirect method appears in nearly every set of audited Indian accounts. It is the safer default if nobody has told you otherwise.
Annually for lenders and auditors, quarterly for yourself. A monthly version is worth the effort if you are carrying a working capital limit, because that is where a slide in collections shows up first.
Most packages will produce a draft once your ledgers are complete and classified. The classification is the part that needs a human eye. Software cannot always tell a loan repayment from a supplier payment unless the underlying journal entries were tagged correctly.
It means the core business consumed cash rather than producing it during the period. One bad quarter during an expansion is normal. A full year of it, funded by borrowing, is the signal that the net profit figure is not telling the whole story.
The same statement. Nothing stops a proprietor or partnership firm from preparing one. Our retail store profitability template covers the profitability half of what a lender asks for alongside it.
