Most business owners watch their profit and loss statement closely and glance at their balance sheet occasionally, but many never look at the third core financial statement at all: the statement of cash flows. That is a mistake, because profit and cash are not the same thing. A company can report a healthy profit and still run out of money, and the cash flow statement is the one report that shows you exactly why.
This guide explains what the statement of cash flows is, how its three sections work, and how a Singapore SME owner can read it to understand the real health of the business. It follows on from our guides to reading your financial statements and cash versus accrual accounting.
Why Profit and Cash Are Different
Under accrual accounting, which is what Singapore financial reporting standards require, you record income when it is earned and expenses when they are incurred, regardless of when cash changes hands. That gives a truer picture of performance, but it also means your profit figure can be very different from the movement in your bank balance.
A few everyday examples make the gap clear. You raise a large invoice and book the revenue, so profit rises, but the customer pays sixty days later, so cash has not moved. You buy inventory or equipment with cash, so the bank falls, but profit is barely touched because the cost sits on the balance sheet. You repay a loan, which reduces cash but is not an expense at all. The statement of cash flows exists to reconcile these differences and show where money actually came from and went.
The Three Sections of the Statement
The statement of cash flows organises every movement of cash into three categories. Reading them together tells a story about how the business is funded and whether it is sustainable.
1. Operating activities
This section shows cash generated or consumed by the core business: cash from customers, less cash paid to suppliers, staff, and for day-to-day running costs. It is the single most important number in the statement. A business that consistently produces positive operating cash flow is generating real money from what it does. One that reports profits but negative operating cash flow is often trapping its earnings in unpaid invoices or unsold stock, which is a warning sign worth investigating.
2. Investing activities
This section captures cash spent on, or received from, longer-term assets: buying equipment, vehicles, or property, and any proceeds from selling them. Negative investing cash flow is normal and often healthy, because it usually means the company is investing to grow. What matters is whether the operating cash flow can support that investment over time.
3. Financing activities
This section shows cash raised from or returned to funders: loans drawn down or repaid, new share capital injected, and dividends paid to shareholders. It reveals how the business is funded and whether it is increasingly reliant on borrowing. A company covering operating shortfalls with ever more debt is on a path that needs attention.
How the Sections Fit Together
| Section | Answers the question | Healthy pattern |
|---|---|---|
| Operating | Does the core business generate cash? | Consistently positive |
| Investing | Is the company investing for the future? | Negative, funded by operations |
| Financing | How is the company funded? | Manageable, not covering losses |
Add the three sections together and you get the net change in cash for the period, which should reconcile to the movement in your bank balance from the start of the period to the end. That reconciliation is a useful integrity check, and it is only reliable if your chart of accounts and monthly bank reconciliations are in good order.
Direct and Indirect Methods
The operating section can be presented two ways. The direct method lists actual cash receipts and payments, such as cash collected from customers and cash paid to suppliers. It is intuitive but requires more detailed data. The indirect method, which most companies use, starts from net profit and adjusts for non-cash items such as depreciation, and for changes in working capital such as receivables, payables, and inventory. Both arrive at the same operating cash figure. The indirect method is popular precisely because it makes the link between profit and cash explicit: you can see, line by line, why a profitable month did or did not generate cash.
A Short Worked Illustration
Imagine a company reports 50,000 dollars of profit for the quarter. It looks healthy, but the bank barely moved. The indirect cash flow shows why: depreciation of 10,000 dollars is added back because it is not a cash cost, but receivables rose by 40,000 dollars as sales were made on credit and not yet collected, and inventory rose by 15,000 dollars. Operating cash flow is therefore around 5,000 dollars, not 50,000 dollars. The profit is real, but it is tied up in unpaid invoices and stock. This is the single most valuable insight the statement offers, and it points straight to the fix: tighten collections and manage inventory, themes we cover in our guide to accounts receivable and credit control.
What to Look For as an Owner
You do not need to be an accountant to draw useful conclusions. Start with operating cash flow: is it positive, and is it growing in line with profit? If profit is rising but operating cash is not, dig into your receivables and inventory. Next, check whether operating cash comfortably covers your investing and loan repayments; if it does not, you are relying on external funding to stand still. Finally, look at the trend over several periods rather than a single month, since cash flow is naturally lumpy.
Who Needs to Prepare One
For statutory financial statements, a full statement of cash flows is part of a complete set of accounts under Singapore financial reporting standards. Smaller companies applying the simplified standard for smaller entities have lighter requirements, and companies that qualify for audit exemption as a small company still need proper accounts even without an audit. Whatever your filing obligation, preparing a monthly cash flow view is one of the most valuable management habits an SME can build, and it pairs naturally with a disciplined month-end close.
Beyond the statutory version, a simple rolling cash flow forecast is one of the most useful tools an owner can keep. Looking twelve or thirteen weeks ahead at expected receipts and payments lets you spot a squeeze before it happens, time large purchases sensibly, and approach your bank from a position of foresight rather than crisis. The historical statement of cash flows tells you what happened; the forecast, built on the same understanding, tells you what to do next.
Get Help Making Sense of Your Cash
If your accounts show a profit but your bank balance never seems to reflect it, a proper cash flow analysis usually reveals why, and points to the fix. Our accounting team can prepare cash flow statements, set up monthly management reporting, and help you interpret the numbers so you can plan with confidence. Reach out and we will help you turn your figures into decisions.
— The Editorial Team, Raffles Corporate Services