Making Sense of Your Cash Flow Statement

cash flow

The cash flow statement is one of the most important documents that your company produces. It’s the main financial statement a business produces, alongside the balance sheet and the income statement. A cash flow statement should provide aggregate data regarding all of the cash moving in and out of a company during a given quarter.

Before we break down what’s going on in your cash flow statement, it’s important to keep in mind that if you’re company is using accrual accounting, this statement may not necessarily reflect the changes to your company’s financial position.

What is the Cash Flow Statement?

The cash flow statement reports all cash generated and used by your company during a given predefined interval (monthly, quarterly, for the fiscal year ending, and so on…). The statement classifies all incoming and outgoing cash in the following categories:

  • Operating Activities Cash transactions that were directly affected by your operational activities (payments for inventory, cash received for your invoices, etc.).
  • Investing Activities Cash used and received from the purchase and sale of long-term investments including property, equipment, etc.
  • Financing Activities The issuance and repurchase of your company’s bonds and stocks as well as the payment of dividends.

What can I learn from the cash flow statement?

For anyone who works in accrual accounting, you know that income and expenses being reported aren’t necessarily moving in and out of the business as indicated in the income statement. For this reason, business people and investors give higher importance to the cash flow statement. This statement can be used in a few different ways. Here, we’ll focus on the 2 most common functions:

  1. Evaluation of the company’s health. By comparing the operating activities section of the report to the company’s net income, you can learn a lot about the health of the business: how quickly the business is paying its suppliers and is paid by its customers. If the cash from operating activities is consistently greater than the net income, earnings are said to be high quality because the business is paid early. If earnings from operating activities are lower, a business needs to analyze why it takes time for the net income to become cash, or why it income isn’t becoming cash at all.
  2. Analysis of the company’s cash needs. If a company is consistently generating more cash than it uses, the company will be able to increase its dividend, buy back stock, pay off debts, or even acquire another company. These are all positive moves in the eyes of stockholders and/or investors. If, on the other hand, the company lacks cash, further analysis is required to find out why. Maybe the company is growing and requires additional funding, or it is not collecting on time.

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Tags: Financing