The cash flow statement

The cash flow statement explains the change in cash between two balance sheets. It starts from the P&L and walks you to the bank. Ending cash here must match cash on the ending balance sheet. That is the link.

Three sections:

1. Operating — cash from running the business (collections, payroll, vendors).
2. Investing — buying or selling long-lived assets, sometimes acquisitions or marketable securities.
3. Financing — issuing equity, borrowing, repaying debt, stock buybacks (rare early).

Walking through the indirect method

Net income
+ Non-cash expenses (D&A, stock-based comp)
± Changes in working capital
  (↑ AR = use of cash; ↑ deferred revenue = source of cash)
= Cash from operations
± Cash from investing
± Cash from financing
= Net change in cash

Rising accounts receivable means you recognized revenue (or billed) but have not collected — a use of cash. Rising deferred revenue means customers paid before you fully earned it — a source of cash. Depreciation and stock-based compensation reduced net income without touching cash, so you add them back.

One quarter, worked out

Starting cash $2,000,000. AR $100,000. Deferred revenue $400,000.

During the quarter: recognized revenue $600,000; collected $750,000; AR ending $80,000; cash opex and COGS paid $900,000; capex $50,000; net loss −$250,000 after $20,000 of depreciation.

Start deferred     400,000
+ Collections      750,000
− Revenue          600,000
≈ End deferred     550,000
Increase in deferred = 150,000
Decrease in AR       = 20,000

Net loss                         −250,000
+ D&A                             +20,000
+ Decrease in AR                  +20,000
+ Increase in deferred revenue   +150,000
≈ Cash from operations           −60,000
− Capex                           −50,000
≈ Net change in cash             −110,000
Ending cash = 2,000,000 − 110,000 = $1,890,000

Same quarter with only monthly billing (collections = revenue = $600k, AR flat, no deferred boost):

CFO ≈ −250k + 20k = −$230,000
After capex −50k → cash change ≈ −$280,000
Ending cash ≈ $1,720,000

Annual prepay saved roughly $170k of cash drain versus a pure monthly book at the same recognized revenue and loss. That is why collections policy belongs in the financial model and in runway planning.

Common mistakes

• Reading total cash change as operating health. A raise can make the bank go up while operations drain $2M.
• A model that only projects revenue and expenses. It silently lies about cash.
• Ignoring capex. Laptops and capitalized software are investing outflows, not opex on this statement.

Check yourself

Net income is −$200k, depreciation is $10k, deferred revenue rose $80k, AR rose $30k. What is cash from operations?

−$140k. −200 + 10 + 80 − 30 = −140.

Which section is a venture raise?

Financing. It is not operating cash flow.

Key takeaways

• Three sections: operating, investing, financing.
• Indirect method: net income, plus non-cash, plus working-capital changes.
• Ending cash must match the ending balance sheet.
• Annual prepay shows up as rising deferred revenue — a source of operating cash.

Further learning

Next, the SaaS-specific stock: deferred revenue.