Cash Flow Statement
tl;dr
The Cash Flow Statement tracks the movement of cash in and out of a business. It has three sections: operating activities (day-to-day business operations), investing activities (buying and selling assets), and financing activities (loans, debt, dividends). It’s essential for assessing a company’s ability to meet its financial obligations, manage investments, and ensure sustainable growth. A strong cash flow indicates that the company can pay bills, invest, and avoid financial trouble.
Definition.
A financial document that provides aggregate data regarding all cash inflows and outflows a company receives. Pro tip: see fundamental trading.
Real-World Example.
A Cash Flow Statement is one of the three major financial statements that businesses use to track the flow of cash in and out of the company over a specific period. It helps businesses and investors understand how well a company generates cash to meet its financial obligations and fund its activities.
For example, imagine a retail store that has strong sales revenue, but its bills (such as rent, employee salaries, and inventory purchases) are paid after the sales are made. The cash flow statement helps to show how much cash the store has available at any given moment to pay those bills, even if the revenue hasn’t been received yet.
How to Use the Cash Flow Statement.
- Operating Activities:
- This section includes the day-to-day cash inflows and outflows from the company’s core business activities. It shows how much cash is generated or used from sales, inventory purchases, wages, taxes, and other routine activities.
- Example: A bakery might see cash inflows from selling baked goods and cash outflows from buying flour, sugar, and paying staff.
- Investing Activities:
- Cash flows related to the purchase or sale of long-term assets such as equipment, property, or investments in other businesses.
- Example: A company buys new machinery for $100,000, which would be shown as a cash outflow in the investing activities section. If the company sells a piece of equipment for $10,000, it would be a cash inflow.
- Financing Activities:
- This section tracks the inflow and outflow of cash related to borrowing and repaying debt, issuing stock, or paying dividends to shareholders.
- Example: If a company takes out a loan to expand its business, the loan would show up as a cash inflow. If the company pays off part of its debt, that payment would appear as a cash outflow.
How to Use the Cash Flow Statement.
- Track Cash Position:
- The cash flow statement provides insights into a company’s liquidity—its ability to cover short-term expenses with cash. A positive cash flow means the company can pay its bills, invest in new projects, and cover debts. A negative cash flow might indicate problems, like operating losses or issues collecting payments.
- Assess Operating Efficiency:
- A strong cash flow from operations indicates that a company is generating enough money through its core activities to stay afloat without relying on borrowing or selling assets. For example, a company generating consistent positive cash flow from operations suggests financial health and sustainability.
- Evaluate Investment Strategies:
- Investors and analysts use the investing section of the cash flow statement to assess how the company is using its resources for growth. Is the company purchasing assets that will benefit the business long-term, or is it selling valuable assets to generate cash? This can give insights into the company’s long-term strategy.
- Debt and Dividend Management:
- The financing section is useful for understanding how a company finances its operations—whether it relies on debt, equity, or dividends to fund its business. High debt repayments may indicate a company is over-leveraged, while paying dividends can signal a commitment to returning profits to shareholders.
- Forecasting Cash Needs:
- Businesses use the cash flow statement to predict how much cash they’ll need in the future. If a company expects negative cash flow in the coming months, it might need to secure financing or make adjustments to its spending plans. This helps ensure that they don’t run into cash shortages.
- Cash Flow and Profitability:
- While profitability (shown in the income statement) tells you how much a company is earning, the cash flow statement shows how much cash is actually coming in and out. A company can be profitable but still run into trouble if it doesn’t have enough cash to pay bills, which is why the cash flow statement is crucial for assessing financial health.
