# The cash flow statement and the three financial statements > How the three financial statements link, with a cash flow statement example: operating, investing and financing cash, built from profit with the indirect method. - Course: [Finance for Product People: From Unit Economics to Business Cases](https://productovi.com/courses/finance-for-product.md) - Module: Where did the money go? - Lesson 10/32, ~25 min - Source: https://productovi.com/courses/finance-for-product/cash-flow-statement ## Three reports, one company **Alex Tutor:** Back at Klasna's product team, where Hanna's quarterly reports have just arrived. **Leo:** Hanna sends me three reports every quarter. Honestly, I read the P&L and skip the other two. **Hanna:** Then you see a third of the company. Last lesson showed why profit alone can surprise you. **Alex Tutor:** Each of the three financial statements answers its own question. The **P&L**: what did we earn over a period? The **balance sheet**: what do we have and owe on one date? The **cash flow statement**: where did cash come from and go during the period? > **Exercise:** Match each report to the question it answers. ## Three kinds of cash **Alex Tutor:** The cash flow statement sorts money into three sections. **Operating**: running the business, lessons, payouts, salaries. **Investing**: buying things that serve for years. **Financing**: money from lenders and owners, and paying it back. **Sofia:** So the 432,000 for laptops in August goes to investing? **Alex Tutor:** Yes. It's **capital expenditure**, capex for short. And if Klasna ever takes a bank loan, the money received and every repayment go to financing. > **Exercise:** Which of these go into Klasna's **investing** cash flow? Select all that apply. ## The indirect method: starting from profit **Alex Tutor:** Most companies build the operating section backwards, from profit. That's the **indirect method**: start with operating profit, add back costs that moved no cash, such as **depreciation**, then adjust for balances that grew or shrank. The direct method would list cash received and paid instead. **Alex Tutor:** Prepaid lessons, our **deferred revenue**, grew? Cash came in ahead of revenue: add it. **Receivables** grew? Revenue came ahead of cash: subtract. **Payables** grew? Costs came ahead of payment: add. **Alex Tutor:** Try one of those rules on an invoice Klasna will meet soon. > **Exercise:** At the end of November Klasna invoices a Teams client 640,000 UAH for lessons already delivered; the client will pay in January. The revenue is in November’s operating profit. How does the indirect method treat this invoice in November’s operating cash flow? **Hanna:** Here are Klasna's first nine months of the school year. No laptops yet, no loans, no unpaid invoices. Just the prepayments, and the provider's fee we paid on them up front. > **Klasna's cash flow statement, September 2025 – May 2026** > > | | UAH | > |---|---| > | Operating profit | 1,647,290.72 | > | + Increase in prepaid lessons (deferred revenue) | 1,578,469 | > | − Provider's fees paid on that prepaid money | −39,461.72 | > | **Operating cash flow** | **?** | > | Investing cash flow | 0 | > | Financing cash flow | 0 | > | Cash on 1 September 2025 | 600,000 | > **Exercise:** Use Klasna's cash flow statement for September 2025 – May 2026. What was Klasna's **operating cash flow** for those nine months? ## How the three financial statements link **Sofia:** Where does the balance sheet come in? **Alex Tutor:** Everywhere. Cash on the balance sheet on 31 May is 600,000 plus the period's net cash flow. The 1,578,469 is the growth of a liability on it. And the profit itself ends up in equity, what the company owes its owners. **Alex Tutor:** Now follow the laptops through all three. August: cash falls 432,000 in investing, an asset of 432,000 appears on the balance sheet. From September: 18,000 a month of depreciation in the P&L, the asset shrinks by the same, and the operating section adds it back. **Leo:** Added back? So depreciation makes cash? > **Exercise:** **True or false:** depreciation is added back in the operating section because it brings cash into the company. **Alex Tutor:** Put the rules together on one quarter. > **Exercise:** Suppose a quarter at Klasna with operating profit of 1,704,699 UAH and 54,000 of laptop depreciation. Over the quarter, receivables grow by 640,000 (an unpaid Teams invoice); no other balance changes. Using the indirect method, what is the **operating cash flow**? ## Cash flow statement example: the whole year **Hanna:** Now my forecast to 31 August. Operating profit for the year: 744,174.72. Prepaid lessons fall by 1,086,661 over the year, so we get back 27,166.53 of fees paid earlier. Laptops: 432,000. No financing. **Sofia:** Prepayments falling means families paid for fewer future lessons than they used. That's cash going the other way. **Alex Tutor:** Exactly. Build the year the same way and see where cash ends up on 31 August. **Alex Tutor:** First, line up the steps you will follow. > **Exercise:** Put the steps for building a cash flow statement with the indirect method in order, from profit to closing cash. > **Exercise:** Hanna's forecast for the full year: operating profit 744,174.72 UAH; prepaid lessons fall by 1,086,661; fees paid earlier on them give back 27,166.53; laptops cost 432,000; no financing. Cash on 1 September 2025 was 600,000. How much cash will Klasna have on **31 August 2026**? ## Your turn: explain it to Leo **Leo:** Fine, I'll read all three. Give me a short guide: what do I look for in the cash flow statement, and how does it tie to the other two? **Alex Tutor:** Use Klasna's year as the example: profit, operating cash flow, investing, and the cash on 31 August. **Sofia:** A guide with real numbers, then. > **Exercise:** Write Leo a short guide (3–5 sentences): what to look for in the cash flow statement and how it ties to the P&L and the balance sheet. Use Klasna's year as the example: operating profit 744,174.72 UAH, operating cash flow −315,319.75, laptops −432,000 in investing, no financing, and cash going from 600,000 on 1 September 2025 to −147,319.75 on 31 August 2026. > **Key ideas** > > - **P&L**: what was earned over a period. **Balance sheet**: what the company has and owes on a date. **Cash flow statement**: where cash came from and went. > - Three sections: **operating** (running the business), **investing** (capex such as laptops), **financing** (loans, owners' money, repayments). > - The operating section starts from profit, adds back non-cash costs such as depreciation, and adjusts for balance changes: deferred revenue up adds cash, receivables up use it, payables up add it. > - Closing cash on the balance sheet = opening cash + the net of all three sections. Klasna: 600,000 + 3,186,298 = 3,786,298 on 31 May. > - Klasna's year: operating profit 744,174.72, operating cash flow −315,319.75, investing −432,000, cash on 31 August −147,319.75. **Alex Tutor:** A profitable year that ends below zero. Next we'll ask how long the cash lasts at the summer pace, and whether Klasna reaches September. - Previous lesson: [Profit is not cash: net income vs cash flow](https://productovi.com/courses/finance-for-product/profit-is-not-cash.md) - Next lesson: [Burn rate, cash runway and staying alive](https://productovi.com/courses/finance-for-product/burn-and-runway.md) --- Productovi Learning. Free, no sign-up needed to read.