Cash Flow Statement:
How to Build and Read (With Examples)
Last Updated: July 03, 2026
A cash flow statement is a financial report that summarizes cash received and cash paid during a period, organized into operating, investing, and financing activities. It explains how net income and balance-sheet changes translate into actual cash movement. Stakeholders use it for cash flow management, liquidity planning, and evaluating whether a company can fund operations without relying solely on external financing.
The cash flow statement has three sections. Operating activities show cash from core business receipts and payments - including collections, supplier disbursements, and payroll. Investing activities cover capital expenditures, asset sales, and securities. Financing activities include borrowing, debt repayment, equity issuance, buybacks, and dividends. Together they reconcile to the period change in cash and cash equivalents.
Net income follows accrual accounting; operating cash flow follows cash timing. Revenue can be recognized before customers pay, while payroll and materials consume cash on fixed schedules. Rising accounts receivable, inventory builds, or delayed invoice processing often produce profitable periods with negative operating cash - especially when collections lag and disbursements do not.
Operating cash flow (OCF) is cash generated or used by core operations. Free cash flow subtracts capital expenditures from OCF, showing cash available after required reinvestment in the asset base. OCF signals day-to-day sustainability; FCF signals capacity for debt service, dividends, buybacks, and discretionary growth after maintenance capex.
The direct method lists major operating cash receipts and payments. The indirect method starts with net income and adjusts for depreciation, amortization, and working-capital changes in receivables, inventory, and payables. Both must arrive at the same operating cash total under U.S. GAAP and IFRS; the indirect method is more common because it links directly to the income statement and balance sheet.
Accounts payable automation shortens invoice intake, approval, and payment automation scheduling so operating-section lines reflect when cash actually leaves the business. Faster document automation and workflow automation reduce AP backlog distortions in accounts payable working-capital adjustments. That produces more reliable cash flow analysis and treasury forecasts for leadership and lenders.
The cash flow statement is one of three core financial statements. It shows how cash moved through a business during a reporting period - separate from accrual revenue on the income statement and balances on the balance sheet. Finance teams, investors, and lenders use it to judge liquidity, repayment capacity, and whether reported profit is backed by real cash.
Strong cash flow management depends on timely visibility into receipts and disbursements. Consider a manufacturer that records $2M in quarterly revenue but pays suppliers on Net-45 while customers pay on Net-60: net income can look healthy while operating cash flow turns negative because cash leaves for payroll and materials before collections arrive. That gap often traces to slow invoice processing, manual AP approvals, and delayed payment runs - not weak sales.
Modern finance teams pair cash flow analysis with accounts payable automation, workflow automation, and document automation so AP, AR, and treasury data feed the statement faster. According to APQC research cited by CFO.com, 54% of organizations name cash flow forecasting accuracy as their biggest liquidity challenge - making reliable operating-section data more critical than ever.
Actionable takeaway: Reconcile your indirect-method operating section monthly: compare net income to changes in accounts receivable, inventory, and accounts payable. If AP aging improves but operating cash flow does not, audit invoice-to-payment cycle time before revising forecasts or credit policies.
Direct Answer: What Is a Cash Flow Statement?
A cash flow statement is a financial report that summarizes cash received and cash paid during a period, organized into operating, investing, and financing activities. It explains how net income and balance-sheet changes translate into actual cash movement. Stakeholders use it for cash flow management, liquidity planning, and evaluating whether a company can fund operations without relying solely on external financing.
See how our intelligent document automation solution can streamline your cash flow statement processes.
The cash flow statement is the financial report analysts reach for when profit and cash tell different stories. While the income statement records revenue when earned and the balance sheet snapshots obligations at period-end, the statement of cash flows shows whether the business actually collected and disbursed cash. That distinction drives cash flow management, covenant compliance, and every credible liquidity assessment.
Effective cash flow management means matching cash timing to operating needs - not just watching the bank balance. Finance teams monitor inflows from collections, outflows for payroll and suppliers, and the gap between accrual profit and operating cash flow. In financial analysis, sustained negative operating cash while net income rises often signals working-capital strain, aggressive revenue recognition, or process delays - not a temporary blip.
According to PwC’s October 2024 Pulse Survey, 35% of CFOs are delaying major investments because of balance sheet and cash flow management pressures. That makes accurate cash flow analysis a board-level priority - not a month-end afterthought.
AP example: A distributor reports $800,000 in quarterly net income but operating cash flow falls $120,000 short of plan. Investigation shows supplier invoices sat in approval queues for 12 days on average, pushing $400,000 of disbursements into the next period. The income statement looked strong; the cash flow statement exposed a payable timing problem that accounts payable automation and faster invoice processing could have surfaced earlier.
Modern finance functions connect ERP treasury modules with workflow automation and payment automation so operating-section line items reflect real disbursement dates. Rolling forecasts, scenario planning, and free cash flow tracking then rest on data finance can defend to lenders and auditors.
Actionable takeaway: Each quarter, compare net income to cash from operations and document the top three reconciling items - typically accounts receivable, inventory, and accounts payable. If payables drive the variance, prioritize AP cycle-time metrics before changing dividend, capex, or debt policy.
Every cash flow statement organizes cash movement into three sections: operating, investing, and financing activities. Under U.S. GAAP and IFRS, companies may present the operating section using the direct method (cash receipts and payments) or the indirect method (net income adjusted for non-cash items and working-capital changes). Either format must reconcile to the period change in cash and cash equivalents on the balance sheet.
Section | What it captures | Best for assessing | Typical red flag |
Operating | Cash from sales, supplier payments, payroll, and working-capital changes | Core business sustainability and short-term liquidity | Negative OCF while net income is consistently positive |
Investing | Capex, asset disposals, M&A, and investment purchases or sales | Growth investment and asset-base maintenance | Repeated asset sales funding operating shortfalls |
Financing | Debt draws and repayments, equity issuance, buybacks, dividends | Capital structure, leverage, and shareholder returns | Rising debt inflows masking weak operating cash generation |
The operating section answers whether the business generates enough cash from day-to-day work to fund itself. It includes cash receipts from customers and payments to suppliers and vendors, payroll, rent, and most recurring expenses. Under the indirect method - the format most public companies use - analysts start with net income and adjust for depreciation, amortization, and changes in accounts receivable, inventory, and accounts payable.
Positive operating cash flow means core operations are funding themselves without constant reliance on new borrowing or asset sales. A services firm that automates invoice processing and routes AP through ERP workflow automation often sees payables post closer to goods receipt, which makes operating-section working-capital lines match economic reality - not email backlog.
Teams pairing document automation with accounts payable automation reduce the lag between invoice approval and scheduled payment automation runs. That improves both DPO discipline and the accuracy of cash flow analysis when treasury builds 13-week forecasts.
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Investing activities reflect how a company deploys cash into long-term value - and how it recovers cash when assets or stakes are sold. Typical outflows include purchases of property, plant, and equipment, software capitalization, and acquisitions. Inflows come from divestitures, maturing investments, and proceeds when equipment or real estate is sold.
Negative net investing cash flow is normal for growing companies that reinvest in capacity, ERP upgrades, or automation platforms. The analyst’s job is to judge whether capex supports durable free cash flow or merely replaces worn assets. A manufacturer spending $1.5 million on automated warehouse systems may show a large investing outflow in year one while operating cash improves in later periods through lower labor cost and fewer shipping errors.
Compare investing trends to depreciation and stated growth strategy. Repeated under-investment paired with rising maintenance expense can signal future operating pressure even when current-period cash looks adequate.
Financing activities show how the company funds gaps between operating cash and investing needs. Cash inflows include new bank lines, bond issuances, and equity raises; outflows include principal repayments, share repurchases, and dividend distributions. This section reveals whether growth is self-funded or dependent on external capital markets.
Sustained positive financing cash flow can support expansion, but it also raises leverage questions when operating cash flow is weak. Lenders review financing-section trends alongside debt covenants and interest coverage. A retailer that refinances revolving credit every year while operating cash stagnates may be masking structural margin or working-capital problems.
Integrating treasury, ERP, and AP systems gives finance a single view of scheduled debt service and vendor disbursements - so financing decisions are not made on stale cash projections.
Read together, the three sections explain where cash originated, where it was deployed, and whether the business can sustain operations without eroding liquidity. That integrated view is what makes the cash flow statement indispensable for investors, credit analysts, and internal cash flow management teams.
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Below is a simplified sample template of a cash flow statement:
_______
Company Name
Cash Flow Statement
For the Year Ended [Date]
Operating Activities:
Net Income (Profit/Loss) $XXX
Adjustments for:
Depreciation and Amortization $XXX
Changes in Working Capital:
Increase/(Decrease) in Accounts Receivable $XXX
Increase/(Decrease) in Inventory $XXX
Increase/(Decrease) in Accounts Payable ($XXX)
Increase/(Decrease) in Accrued Expenses ($XXX)
Cash Flow from Operating Activities $XXX
Investing Activities:
Purchase of Property, Plant, and Equipment ($XXX)
Proceeds from Sale of Property, Plant, and Equipment $XXX
Purchase of Investments ($XXX)
Proceeds from Sale of Investments $XXX
Cash Flow from Investing Activities ($XXX)
Financing Activities:
Proceeds from Issuance of Debt $XXX
Repayment of Debt ($XXX)
Issuance of Common Stock $XXX
Dividends Paid ($XXX)
Cash Flow from Financing Activities $XXX
Net Increase/(Decrease) in Cash and Cash Equivalents $XXX
Beginning Cash and Cash Equivalents $XXX
Ending Cash and Cash Equivalents $XXX
________
This template provides a basic structure for a cash flow statement, including sections for operating activities, investing activities, and financing activities. It also calculates the net increase or decrease in cash and cash equivalents and includes the beginning and ending balances of cash and cash equivalents for the period.
Important: Please note that actual cash flow statements may include additional line items and details depending on the complexity of the company’s operations and financial transactions.
CONTINUE LEARNING: Guide to AI-Enabled Order-to-Cash Automation
Cash flow analysis turns the cash flow statement from a compliance deliverable into a decision tool. Unlike net income, operating cash reflects whether customers paid, suppliers were settled on schedule, and working capital moved in line with the business model. Finance leaders, credit analysts, and operators use this statement to judge liquidity, funding needs, and whether reported earnings convert to cash.
Follow a consistent review sequence each period. The steps below apply to public filings, lender packages, and internal board decks.
Start with cash from operating activities - the section that shows whether core operations fund themselves. Positive operating cash flow means the business collected enough cash to cover routine expenses without leaning on new debt or asset sales. Negative operating cash for multiple periods, while net income stays positive, often points to receivables buildup, inventory bloat, or payables timing - not necessarily weak demand.
Under the indirect method, walk from net income through depreciation, amortization, and changes in accounts receivable, inventory, and accounts payable. A $50,000 increase in receivables reduces operating cash by $50,000 even when revenue already hit the income statement. That is why collections and invoice processing speed matter as much as sales closes.
Teams improving cash flow management often deploy accounts payable automation and workflow automation so disbursements align with approved terms instead of batch check runs at month-end. Cleaner AP data makes operating-section reconciliations faster and more defensible.
Investing cash flow shows where the company deploys capital for long-term assets and how it recovers cash through divestitures or investment sales. Negative investing cash is common when a firm buys equipment, upgrades ERP systems, or acquires complementary businesses. The key question is whether spend supports future free cash flow or only maintains worn assets.
Pair investing outflows with depreciation trends and stated strategy. A logistics company that spends $900,000 on fleet replacement but shows flat operating cash may be sustaining capacity - not expanding margin. Repeated asset sales to fund operations is a warning sign that belongs in every analyst memo.
Financing activities reveal how the company bridges gaps between operating cash and investing needs. Inflows from new debt or equity can fund growth, but persistent reliance on financing cash while operating cash stagnates raises leverage and covenant risk. Outflows for dividends, buybacks, and principal repayments show how management prioritizes shareholder returns versus balance-sheet strength.
Map scheduled debt service from the financing section against treasury forecasts fed by ERP and payment automation schedules. Misaligned projections here are a common source of surprise liquidity crunches.
The net increase or decrease in cash and cash equivalents should reconcile to the change in cash on the balance sheet from period to period. A positive net change means the entity held more cash at period-end; a negative change signals drawdowns that may be planned - or a sign that operations and investments outpaced internal generation.
AP example: A SaaS vendor closes the quarter with $40,000 net income and positive operating cash on paper, but net cash falls $180,000 because $220,000 of approved vendor invoices were not scheduled for payment until the first week of the next month. Treasury saw a liquidity gap that the income statement masked. Faster document automation at invoice intake would have surfaced the payable backlog before the close.
Recommended reading: AP Automation for Cash Flow Management
Single-period snapshots mislead. Plot operating, investing, and financing cash across eight or more quarters to spot structural shifts - such as declining operating cash margin, rising capex without revenue growth, or increasing debt draws in flat markets.
Seasonal businesses should compare the same fiscal quarter year over year rather than sequential quarters alone. Watch for one-time items - litigation settlements, tax refunds, or asset sales - that inflate or depress a single period.
Benchmark against industry peers and median ratios for your sector. Useful metrics include operating cash flow margin (operating cash ÷ revenue), free cash flow yield, and cash flow to debt ratio. A retailer with 4% operating cash margin in a sector averaging 8% may face margin, rent, or working-capital disadvantages worth investigating.
According to APQC research cited by CFO.com, organizations using finance automation for forecasting reported a median 40% improvement in forecast accuracy - peer comparisons land better when your underlying cash data is timely and complete.
Finally, integrate the cash flow statement with the income statement and balance sheet. Net income on the income statement should connect to operating cash through documented adjustments. Balance-sheet changes in receivables, inventory, payables, and debt should explain most of the bridge.
When statements disagree - profit rising, operating cash falling, and payables flat - investigate process bottlenecks in collections and AP before revising growth forecasts. That triangulation is what separates surface-level cash flow analysis from analysis lenders and boards trust.
Actionable takeaway: Build a one-page quarterly cash flow review template: operating cash vs. net income bridge, three-period trend for each section, peer median for OCF margin, and a flagged list of non-recurring items. Assign an owner to clear AP and AR exceptions before the template is circulated to leadership.
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The cash flow statement is the source document for ratios lenders, investors, and CFOs use in cash flow analysis. Three metrics appear in almost every credit memo and board pack: operating cash flow, free cash flow, and cash flow to debt. Each answers a different question about liquidity, reinvestment capacity, and solvency.
Metric | Formula (typical) | Best for | Watch for |
Operating cash flow (OCF) | Cash from operating activities (direct or indirect method) | Core business cash generation and short-term liquidity | One-time working-capital swings from delayed AP or AR postings |
Free cash flow (FCF) | Operating cash flow − capital expenditures | Debt service, dividends, buybacks, and discretionary growth | Under-investment when capex is cut to inflate FCF |
Cash flow to debt ratio | Operating cash flow ÷ total debt | Coverage of interest and principal obligations | Off-balance-sheet leases and guarantees not in total debt |
Operating cash flow measures cash generated or consumed by core operations during a period. It includes collections from customers and cash paid to suppliers, employees, and tax authorities. OCF margin - operating cash divided by revenue - helps compare companies of different sizes within the same industry.
Positive OCF means routine operations are producing cash without depending on new borrowing or asset sales. When OCF trails net income for multiple quarters, examine receivables aging, inventory turns, and whether invoice processing delays are pushing payables into the next period.
Finance teams strengthening cash flow management increasingly tie OCF dashboards to ERP sub-ledgers updated through accounts payable automation and workflow automation, so metrics reflect disbursement reality - not spreadsheet estimates.
Free cash flow is operating cash flow minus capital expenditures required to maintain or grow the asset base. It represents cash available for debt repayment, dividends, acquisitions, or balance-sheet cash accumulation after required reinvestment.
A company with $115,000 in operating cash and $50,000 in equipment purchases shows $65,000 in FCF before financing decisions. Negative FCF is not always alarming - growth-stage firms often invest heavily - but persistent negative FCF funded only by new debt warrants scrutiny.
Boards use FCF to judge dividend sustainability and share-repurchase capacity. Operators use it to prioritize capex against AP optimization and payment automation projects that shorten cash conversion cycles.
The cash flow to debt ratio divides operating cash flow by total debt (short- and long-term borrowings). Creditors and rating analysts use it to assess whether operating performance can service obligations without constant refinancing.
A ratio below 0.15–0.20 often triggers covenant conversations in leveraged industries, though acceptable ranges vary by sector and interest-rate environment. Pair this ratio with interest coverage from the income statement for a fuller solvency picture.
According to PwC’s October 2024 Pulse Survey, 35% of CFOs delayed investment decisions because of balance sheet and cash flow management pressures - making reliable OCF and debt-coverage metrics central to capital allocation.
Actionable takeaway: Each quarter, calculate OCF, FCF, and cash flow to debt from your published cash flow statement and store them beside revenue and net income in a single KPI sheet. Flag any quarter where net income rises but OCF falls more than 10% relative to the prior period.
These metrics turn statement line items into decisions about credit lines, vendor terms, and growth bets. The worked example below shows how operating, investing, and financing sections combine - and how to derive OCF and FCF from fictional Company XYZ.
Below is a simplified indirect-method cash flow statement for fictional Company XYZ - a light manufacturing business that upgraded AP workflows mid-year but still carries manual receivables entry.
Operating Activities:
Net Income: $100,000
Depreciation Expense: $20,000
Increase in Accounts Receivable: ($10,000)
Increase in Accounts Payable: $5,000
Cash Flow from Operating Activities: $115,000
Investing Activities:
Purchase of Equipment: ($50,000)
Sale of Investments: $20,000
Cash Flow from Investing Activities: ($30,000)
Financing Activities:
Issuance of Common Stock: $50,000
Repayment of Long-term Debt: ($10,000)
Payment of Dividends: ($20,000)
Cash Flow from Financing Activities: $20,000
Net Increase/(Decrease) in Cash and Cash Equivalents: $105,000
Beginning Cash and Cash Equivalents: $50,000
Ending Cash and Cash Equivalents: $155,000
Recommended reading: Improve Cash Flow with Working Capital Management
Company XYZ’s operating section starts with $100,000 net income, adds back $20,000 depreciation (a non-cash expense), subtracts a $10,000 receivables increase, and adds a $5,000 payables increase. The result - operating cash flow of $115,000 - exceeds net income because depreciation added back cash the company never paid out this period.
The $10,000 receivables increase is a common friction point: revenue was recognized when invoices were issued, but cash has not yet arrived. The $5,000 payables increase added cash because XYZ received goods and recorded expenses before cash left the bank - often influenced by how quickly supplier invoices move through document automation and approval queues.
Investing activities produced a net ($30,000) outflow after $50,000 in equipment purchases partly offset by $20,000 from investment sales. Free cash flow for the year is $65,000 ($115,000 OCF − $50,000 capex). Financing added $20,000 net - driven by a $50,000 equity raise, partially offset by debt repayment and dividends.
The $105,000 net increase in cash reconciles: $115,000 − $30,000 + $20,000 = $105,000. Beginning cash of $50,000 plus that increase yields the $155,000 ending balance on the balance sheet. If your internal model cannot reproduce that bridge, revisit sub-ledger timing before presenting metrics to lenders.
Important: Actual cash flow statements may include additional line items and details depending on the complexity of the company’s operations and financial transactions.
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Beyond the three main sections, several line items and disclosure concepts shape how readers interpret a cash flow statement. Cash equivalents, non-cash adjustments, lease payments, hedges, and foreign-exchange effects can move operating cash flow without changing net income - or vice versa. Finance teams that master these terms produce cash flow analysis auditors, lenders, and boards trust.
Cash equivalents sit alongside cash on the balance sheet and in the opening and closing balances of the cash flow statement. They must be low credit risk, short maturity, and easily liquidated without material price risk. Treasury bills, commercial paper, and regulated money market funds commonly qualify.
Treasury teams monitor cash plus equivalents as deployable liquidity for payroll, vendor runs, and debt service. Misclassifying restricted deposits or long-dated securities as equivalents overstates near-term cash availability.
Non-cash activities explain why net income diverges from operating cash flow. Depreciation and amortization reduce profit but do not consume cash in the current period - so the indirect method adds them back. Stock-based compensation, impairment charges, and fair-value adjustments behave similarly.
Some significant non-cash events - asset-for-debt exchanges, ROU asset recognition at lease commencement, or acquiring equipment through finance leases - may appear in supplemental disclosures rather than the main statement body. Review footnotes when investing or financing sections look unusually quiet despite large balance-sheet changes.
AP example: A distributor records $35,000 in supplier expenses when goods arrive, but cash pays out 30 days later. The expense hits the income statement immediately; the cash effect appears in operating cash flow only when payment automation executes the disbursement. Non-cash accrual and cash settlement are different events - confusing them skews both cash flow management forecasts and month-end bridges.
Since ASC 842, most lessees record right-of-use assets and lease liabilities on the balance sheet. Cash paid for leases still flows through the cash flow statement, but classification depends on lease type. Operating lease payments are generally classified within operating activities; finance lease payments split with interest in operating activities and principal in financing activities under U.S. GAAP.
Lease cash flows are easy to misread when teams focus only on the income-statement rent expense. The operating section reflects actual cash leaving the bank, which drives liquidity planning and covenant tests tied to free cash flow.
RELATED RESOURCE: What Is Accrual Basis Accounting: Definition and Advantages
A cash flow hedge protects against variability in future cash flows from forecasted transactions - common examples include hedging floating-rate debt interest, commodity purchases, or foreign-currency-denominated sales. The company designates a derivative (forward, swap, or option) whose changes offset expected cash movement.
Under hedge accounting, effective portions of the derivative may be recorded in other comprehensive income until the hedged transaction affects earnings and cash. When the forecasted item settles, amounts reclassify to the income statement alongside the related revenue or expense. Poor hedge documentation can force volatile P&L swings even when economic risk is controlled.
Multinational companies transact in multiple currencies. Cash received or paid in a non-functional currency is translated into the reporting currency using the exchange rate on the transaction date - or a reasonable approximation for high-volume receipts.
The statement of cash flows also reports the effect of exchange-rate changes on cash and cash equivalents as a separate reconciling item when consolidating foreign subsidiaries. That line explains why consolidated cash moved even when local-currency balances were flat.
According to PwC’s October 2024 Pulse Survey, 36% of finance departments already use AI in accounts payable and receivable, with another 24% planning adoption within 12 months - reflecting demand for faster, accurate cash data across entities and currencies.
Teams with global AP volume often pair ERP treasury modules with document automation and accounts payable automation so foreign invoices are captured, approved, and scheduled through consistent workflow automation before cash leaves local accounts.
Actionable takeaway: When reviewing an advanced cash flow statement, check four footnote areas - non-cash disclosures, lease cash paid, hedge activity, and FX effects - before concluding that operating cash flow trends are purely operational. Gaps between accrual expense and cash paid often trace to AP timing, lease classification, or cross-border invoice processing delays.
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The cash flow statement is where accrual accounting meets reality. Net income can look strong while liquidity tightens; the balance sheet can show healthy equity while operating cash flow stalls. Investors, lenders, and boards turn to this statement because it answers a direct question: did the business actually generate and deploy cash during the period?
Throughout this guide, the pattern is consistent. Operating activities reveal whether core work funds itself. Investing activities show reinvestment discipline. Financing activities expose reliance on debt and equity markets. Metrics such as free cash flow and cash flow to debt translate those sections into covenant-ready numbers.
AP example: A growing services firm reported four consecutive profitable quarters but nearly missed payroll twice. The cash flow statement showed operating cash dragged down by receivables growth and unpredictable supplier payment timing - not margin collapse. After implementing accounts payable automation and structured invoice processing, disbursements aligned with approved terms and treasury forecasts stabilized within two close cycles.
Finance teams are under pressure to produce faster, more reliable cash flow analysis. According to APQC research cited by CFO.com, 55% of organizations are increasing focus on forecasting and liquidity planning - and half are specifically working to improve forecasting processes. That starts with statement data that reflects when cash moved, not when documents were finally keyed.
If you take one operational playbook from this article, use it each quarter:
Modern cash flow management increasingly depends on document automation, ERP integration, and workflow automation that feed treasury with timely disbursement and collection data. The statement itself does not change - but the speed and accuracy with which finance can produce and explain it does.
Actionable takeaway: Block 90 minutes before your next board or lender meeting to walk through the latest cash flow statement using the checklist in this guide. Bring one page showing operating cash vs. net income, FCF, and the top three working-capital variances. If you cannot explain those variances without caveats, fix AP and AR timing before revising growth plans.
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