Cash Flow Statement

Cash Flow Statement: Follow the Money

Profits can be manipulated through accounting choices, but cash is real. The cash flow statement tracks actual cash moving in and out of the company. Many experienced investors consider it the most honest financial statement.

Three Sections of Cash Flow

1. Operating Cash Flow (OCF) — Cash generated from the company's core business. This is the most important section. If Safaricom earns cash from M-Pesa transactions and data subscriptions, that appears here. Positive operating cash flow means the business itself is generating cash.
2. Investing Cash Flow — Cash spent on or received from investments. Buying new equipment, building new branches (for banks like KCB), or acquiring other companies shows up as negative cash flow here. This is normal and often healthy, as it means the company is investing in future growth.
3. Financing Cash Flow — Cash from borrowing, repaying debt, issuing shares, or paying dividends. When EABL pays its annual dividend, that cash outflow appears in this section.

Why Cash Is King

• Profits are not the same as cash — A company can report profits while running out of cash if customers are slow to pay or if it overspends on expansion.
• Cash pays the bills — Salaries, rent, and suppliers must be paid in cash, not accounting profits.
• Dividends come from cash — A company needs actual cash to pay you dividends, not just paper profits.

Red Flags in Cash Flow

• Negative operating cash flow — If the core business is consuming cash rather than generating it, that is a serious warning sign.
• Profits but no cash — If a company reports rising profits but operating cash flow is flat or declining, investigate further.
• Heavy reliance on financing — If the company constantly needs new loans or share issues to survive, the business model may be unsustainable.