Net profit, reported on the P&L, is an accounting figure — it includes non-cash items like depreciation and can recognise revenue before cash is actually received. A cash flow statement instead tracks money actually moving in and out of a company over a period, split into three categories.

Cash flow from operating activities covers cash generated or used by the core business — starting from net profit, then adjusting for non-cash items (adding back depreciation, for instance, since it reduced profit but involved no actual cash outflow) and for changes in working capital, such as receivables and inventory increasing or decreasing. A company can report a healthy net profit while operating cash flow is weak, if a large share of that profit is sitting in unpaid customer receivables rather than in cash.

Cash flow from investing activities covers cash spent on or received from long-term assets — purchasing plant and equipment, acquiring another business, or buying and selling financial investments. This is commonly negative for a growing company, since expanding the asset base requires spending cash, and that alone isn't a negative signal by itself; it needs to be read alongside what the investment is funding.

Cash flow from financing activities covers cash exchanged with shareholders and lenders: raising or repaying debt, issuing new shares, paying dividends, or a company repurchasing its own shares. A company paying down borrowings shows a cash outflow here even though it's reducing its liabilities — a case where the cash flow statement and the balance sheet move in connected but different directions.

The three figures added together give the net change in cash for the period — the amount a company's cash balance actually increased or decreased by, reconciling directly to the cash figure reported on the balance sheet at the start and end of that period.

Reading all three sections together, rather than any single one alone, is what makes a cash flow statement useful: a company can be profitable on paper (P&L), report a strong asset base (balance sheet), and still show weak or negative operating cash flow if profit isn't converting into cash — a divergence the P&L and balance sheet alone don't reveal.