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The cash flow statement: why a profitable business runs out of money

The statement that answers the uncomfortable question. Profit and cash are two different figures, and both can be right at the same time.

6 min readTicuenta
The cause, nearly always: the profit includes sales that were invoiced but not yet collected, and it does not include the money that went on stock, on repaying debt or on buying equipment. The cash flow statement corrects exactly that.

The indirect method, step by step

It starts at the net profit and undoes everything that was not a movement of money.

  • Depreciation is added back

    It is an expense that reduced the profit but did not leave the bank. It goes back. How depreciation is calculated.

  • Gains or losses on disposals are reversed

    Because the real cash from that sale is recorded in full further down, under investing activities. Leaving it on both sides would count it twice.

  • The change in working capital is adjusted

    If receivables went up, that money did not come in: it is subtracted. If payables went up, that money did not go out: it is added. This is where most businesses' real problem shows up.

  • It closes with the three activities

    Operating, investing and financing. The total has to equal the real change in cash and bank for the period.

The three activities, and why separating them matters

ActivityWhat goes inWhat it says about the business
OperatingCustomer receipts, supplier payments, payrollWhether the business sustains itself
InvestingBuying and selling equipment, vehicles, investmentsWhether it is growing or selling what it has
FinancingLoans, owner contributions, dividendsWhere the money trading does not produce comes from
The reading that is worth the whole statement. A healthy business generates cash from operating. If the cash comes from financing year after year — new loans, owner contributions — the business is not paying for itself, whatever profit the income statement shows.

Current is not the same as operating

The cash flow classification is independent of current and non-current. A six-month loan is a current liability on the balance sheet and financing in the cash flow. Confusing the two is the usual reason a cash flow does not reconcile.

When the statement does not close against the real change in cash and bank, the short route is to check the activity assigned to the balance sheet accounts that moved in the period. There is almost always one unclassified.

Profit₡3,000,000What the result says
− ₡2,400,000Receivables grewInvoiced, not collected
₡600,000Cash from operatingWhat actually came in
The same period, two very different figures, and both are correct.
From Ticuenta

A cash flow that says when it does not reconcile

It is calculated by the indirect method. And if the change does not match the real movement in cash and bank, it says so, with the amount of the difference.

See how it works

About this article. The cash flow statement and its two presentation methods are in section 7 of the IFRS for SMEs. The 2025 third edition adds new disclosures on financing liabilities and supplier finance arrangements.

Verified as of 24 September 2026. Rules change. This is information, not accounting or tax advice.

Sources: IFRS for SMEs (IFRS Foundation)

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