A cash flow statement tracks the actual money moving in and out of your business, which often differs from what shows up on your P&L. Think of your P&L as showing what you earned or lost during a period, while your cash flow shows when the money actually hit your bank account.

The cash flow statement has three main sections:

Operating Activities: This begins with your net profit from the P&L and adjusts for:

• Non-cash items that affected profit (like depreciation)
• Timing differences (like when customers haven't paid their invoices yet)
• Changes in working capital (like inventory you paid for but haven't sold)

Investing Activities: This shows the cash impact of buying or selling long-term assets. For example, if you buy new equipment for $10,000, your P&L only shows the depreciation expense, but your cash flow statement shows the full $10,000 cash outflow.

Financing Activities: This covers money from funding your business - like taking loans, paying them back, or putting in more of your own money.

Here's a simple example: Your P&L shows $5,000 profit because you made $10,000 in sales and had $5,000 in expenses. But if $3,000 of those sales were on credit (not paid yet), and you still owe $2,000 to suppliers, your actual cash increase would only be $4,000. The cash flow statement explains these differences and shows why your bank balance only went up by $4,000 despite making $5,000 in profit.