The cash flow statement tracks the real cash that moved in and out of a business during a period, grouped into three activities: operating, investing and financing. It exists because profit and cash are not the same thing - a business can be profitable yet run out of cash.
What it means
Operating activities cover cash from the day-to-day running of the business, investing activities cover buying and selling long-term assets, and financing activities cover raising or repaying capital and paying dividends. Because the income statement is prepared on the accrual basis, the cash flow statement reconciles that profit back to the cash actually held, exposing timing gaps between earning and collecting.
Where it fits in
Payroll is a major operating cash outflow: net pay leaves the bank on payday, while PAYE, UIF and SDL leave later when the EMP201 is paid. The gap between recognising the payroll expense and actually paying the cash is exactly the kind of timing difference the cash flow statement makes visible.
Key rules
- Splits cash movement into operating, investing and financing activities.
- Reconciles accrual-basis profit to the change in cash held.
- Net pay and statutory payments are operating cash outflows, often on different dates.
- A business can show a profit yet still have negative operating cash flow.
