Why is the cash flow statement important if we already have the income statement?

What the interviewer wants to hear

• Profit is based on accruals and estimates; cash is harder to manipulate
• Shows whether profit turns into cash
• Reveals working capital, capex and financing needs
• Companies fail from running out of cash, not from low profit

Model answer

The income statement uses accrual accounting, so profit includes sales not yet collected, non-cash expenses like depreciation and many estimates such as provisions. The cash flow statement shows what actually happened to cash. It answers whether profit is turning into cash, how much the business is spending on capex and working capital, and whether it is relying on new debt or equity to keep going. A company can show strong profit while customers delay payment, and then struggle to pay salaries or suppliers. That is why lenders and investors compare operating cash flow with EBITDA or net income over several years. If cash consistently lags profit, I would look closely at receivables, inventory and revenue recognition. In short, profit is an opinion, cash is a fact, and I need both to understand a business.

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