Mathias Schmit et Zoé Guelenne·10 April 2025·8 min read
The balance sheet and the income statement do not tell the whole story. Five practical cases to read cash flows and build your credibility with banks and investors.
In every company, whether small, medium-sized or large, there are four types of activity that drive financial flows: operating activities, financing, investment and the distribution of dividends (non-profit associations excepted).
Yet many business leaders settle for a quick look at the balance sheet and the income statement, believing they have a complete picture of their financial position. It is a common and dangerous mistake. A good leader needs an overview of the whole organisation, and therefore of its four activities. The essential tool to get there? Cash flow analysis.
This article shows why stopping at the balance sheet and the income statement only gives an incomplete picture. Master a simple, accessible method to analyse cash flows (the cash flow statement) and see how studying these four main policies helps you understand what is really happening inside your company: where the financing comes from, how it is invested, to what extent the company creates value through its operations and whether it can afford to pay dividends.
What does the cash flow statement add?
Celebrating annual profits is not enough to assess the financial stability of your company. Neither is knowing how much money you have in the bank at a given moment. What really matters is how that money moves through your operations. What are your main sources of cash? Where does the money go, and how fast? This is where the cash flow statement comes in.
The statement is split into four sections, each reflecting a key aspect of financial management:
Cash flow from operating activities (operating cash flow): the money coming in and going out through the company’s day-to-day operations, in other words its core business. This is where the company’s performance is assessed.
Cash flow from investing activities (investing cash flow): the money linked to buying and selling assets, whether tangible or intangible.
Cash flow from financing activities (financing cash flow): the money linked to sources of financing, such as loans or capital contributions.
Cash flow from the dividend policy: when the annual accounts are approved, a company may decide to distribute part of its profit to its shareholders or partners. This is a dividend distribution. It is a direct cash outflow that must be managed carefully to avoid liquidity problems.
The sum of these four components gives the change in the company’s cash over a given period. It can be written as the following equation (where CF stands for cash flow), which we will use in the practical cases:
This equation helps you answer the essential questions every business leader should ask, for example:
What are the best cash management practices to avoid liquidity problems even when the company is profitable?
How can operating cash flow be increased without compromising the quality of products or services, while ensuring sustainable growth?
Which strategic investments can maximise future profitability without putting excessive short-term pressure on cash?
Is it possible to finance day-to-day activities without constantly taking on new loans?
What is the best strategy to pay dividends while keeping enough liquidity to finance growth and cover the unexpected?
Understanding and mastering these categories of flows gives you the ability to make informed, strategic decisions and to anticipate critical moments before they turn into crises. That is what can separate the companies that survive from those that thrive.
Practical cases to understand it
To illustrate why the cash flow statement matters, let us look at five situations, using the same equation. Each one shows the cash flows of a company that made a profit of 1 million euros. On the surface that may look positive, but these practical cases show how cash flows often reveal a more nuanced reality.
Five companies that each made a profit of 1 million euros, flows in millions of euros. Cases A to C: positive change in cash; cases D and E: negative change in cash. ΔCash = operating CF + investing CF + financing CF − dividends paid.
Case
ΔCash
Operating CF
Investing CF
Financing CF
Dividends paid
A
+2
+4
-2
+1
1
B
+4
-2
+5
+1
0
C
+1
-2
0
+4
1
D
-5
+3
-10
+2
0
E
-2
-4
0
+2
0
Positive changes in cash: from success story to dangerous illusion
Case A: the model student of the cash flow statement
Case A is the archetype of a financially healthy company as seen through the cash flow statement. It generates a positive operating cash flow (+4 M€), which means its day-to-day activities bring in enough money.
Better still, it reinvests in its future (-2 M€), financing part of it with long-term loans (+1 M€). It can even pay dividends to its shareholders (1 M€), all while its cash keeps growing (+2 M€).
This kind of company does not merely survive, it gives itself the means to thrive in the long run. It is the model student of the cash flow statement, able to combine profitability, reinvestment and shareholder satisfaction while preserving its liquidity.
“The cash flow statement is the key to understanding the financial reality of a company.”
Case B: a positive change in cash, but for the wrong reasons
In case B, we are dealing with a company that is losing momentum. Its sales are flat and it struggles to generate cash from its core business. Yet on the surface all seems well: on top of its profit, the company shows a positive change in cash (+4 M€). Looking more closely, however, this improvement has nothing to do with better management of its day-to-day business.
In reality, the company has a negative operating cash flow (-2 M€). So how can this apparent “good health” be explained? Simply because it has decided to sell assets (divestments +5 M€) and to turn to external financing (+1 M€) to make up for its losses.
In the end, this situation reveals a false impression of financial strength that can collapse as soon as divestments or external financing are no longer enough to cover the operating deficit.
Case C: a Ponzi scheme to pay dividends
In case C, the company pays dividends (1 M€) while its operating cash flow is negative (-2 M€). This is typical of a company that wants to keep up an image of stability by paying dividends to its shareholders while its situation is critical. So how does it do it?
In reality, it draws on external financing (+4 M€) to fund its dividend payments. The situation resembles a Ponzi scheme: money from other sources of financing is used to reward shareholders, creating a false impression of financial strength.
Dividends are not paid directly out of accounting profits. Even with a positive accounting profit, the company is sliding into a dangerous financial spiral. To make sure you can afford to pay dividends, it is essential to look closely at operating cash flow. You need to check that the funds generated by the company’s operations are enough to cover these payments, just as you would for interest payments.
Negative changes in cash: from growth bet to cash at risk
Case D: a fall in cash is not necessarily a bad sign
Case D, where the company sees its cash fall (-5 M€), might look worrying at first sight. This fall in cash reflects massive investment in its future (-10 M€), partly financed by operating cash flow (+3 M€) and by external financing (+2 M€).
Although its cash is currently shrinking, this is not necessarily a bad sign. On the contrary, whether it is buying machinery, investing in R&D or acquiring financial assets, these decisions show confidence in the company’s future growth potential. Moreover, if the profitability of these investments has been carefully assessed (for example with the Discounted Cash Flow method, or DCF, which values discounted future cash flows), this situation may well point to future cash inflows.
Case E: when your customers, suppliers and inventory put your cash at risk
In case E, the company loses 2 million euros of cash despite a positive profit, mainly because of a strongly negative operating cash flow (-4 M€). This can be explained by a large gap between the money coming in and going out in its operating activities. This gap is what is called the working capital requirement: the larger it is, the more it weighs on operating cash flow and the more external financing the company needs to keep running (here +2 M€).
To avoid this kind of situation, the company must monitor three key elements:
Trade receivables: if customers pay late, cash comes in later. A stricter payment policy can quickly improve cash.
Trade payables: amounts owed to suppliers are deferred cash outflows. Extending supplier payment terms keeps cash in the business for longer and improves the cash position. However, stretching these terms too far can also damage the relationship of trust with your partners.
Inventory: too much stock ties up cash. An optimised inventory policy can quickly free up liquidity.
Conclusion
The cash flow statement is the key to understanding the financial reality of a company, beyond apparent profits or the amount in the bank. By analysing the flows generated by operations, investment, financing and dividend payments, you get a clear and precise view of cash.
Mastering cash flow analysis is crucial to building solid skills and greater confidence in financial management. This knowledge will help you contribute more effectively and bring real added value to your organisation. Through these practical examples, we hope to have given you the keys to support your company’s financial objectives and strengthen your role within the team.
Financial management, like balance, can be mastered
Reading a cash flow statement, making a reliable diagnosis and building a plan that makes sense: that is the purpose of the Financial Diagnosis and Planning module, taught by Prof. Mathias Schmit. Any questions? Write to us at formations@sagora.eu.
Sagora Finance, editorial line. Article written by Prof. Mathias Schmit and Zoé Guelenne, based on the Financial Diagnosis and Planning module. The five cases are illustrative teaching examples, not real companies.
