Finances

Cash flow statement: what is it and how do you use it?

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This concise guide outlines exactly what a cash flow statement is, what its sections mean, and how you can use it in your business.

The cash flow statement is an important financial document that is used to track cash movement in and out of your company. This report can be used for tax purposes, too. The cash flow statement has three main sections: cash from operating activities (the most commonly referenced), cash from investing activities, and cash from financing activities. 

You may not need a cash flow statement if you are self-employed or your business doesn’t generate income; however, if you do have a business and it requires a cash flow statement, it is important to use it correctly!

What is a cash flow statement?

A cash flow statement is one of the four financial statements that show where money comes in and out of a company. This statement is like a map to help you understand how money enters and leaves the business on an average day, which gives you valuable clues to make better decisions. 

You can use it by looking at when revenue is reported relative to when expenses are incurred (operations details), or where the most significant changes in cash occurred during the year (investing and financing). From there, you can find key relationships between assets and liabilities. A cash flow statement provides you with the following information about your company’s cash flow (current, past, and expected):

  • Amount of total cash in the account at the beginning of the period;
  • Total receipts for this period;
  • Amount of total payments for this period; 
  • Any adjustments to begin or end of periods that need to be included. 

How does it give an overview of your financial health

It gives you an overview of your company’s financial health because it provides the annual revenue generated by your company. By examining it carefully, one can tell what the long-term outlook for the company is and determine whether to invest in the company or not.

Already understanding that investing is most often based on valuation, investors use these results to compute how much they should purchase per share if they wanted 20% annual return after taxes and fees. This information allows them to adjust their holdings appropriately so as to simulate the ranking of stocks within their portfolio so as to minimize risk and maximize return on investment.

What do the sections of the cash flow statement mean?

The different sections of the cash flow statement are all just ways to describe what’s happening with regard to money coming in and money going out. The three main sections are: cash from operating activities, cash from investing activities, and cash from financing activities

Cash from operating activities

Operating cash flow shows the funds that a company has left after all day-to-day operational expenses have been accounted for. This figure can then be used to think about whether or not those funds can be reinvested back into the company for growth initiatives, shareholder payout packages, dividend payments, and so on. In this way, operating cash flow can help steer companies in better directions as they attempt to grow their larger ventures.

Cash from investing activities

A company that invests in other enterprises is engaged in investing activities such as shares, stocks, notes, and others. Cash generated from those investments flows back to the income statement for this category. Differentiating between working capital and financing activities can be difficult at first glance; however, the main difference is the source of funds for those activities. The sale of securities (cash inflow) falls into cash flows from investing and the sale of receivables (cash outflows) falls under cash flows from operating activities.

Cash from financing activities

The cash flow statement is a financial statement that shows how a company’s cash flow has changed over time. The cash flow from financing activities section of the statement shows how the company has generated or used cash from its financing activities, such as issuing new shares, repaying debt, or paying dividends. This section can be helpful for investors because it shows how the company is funding its operations. It can also help you assess a company’s risk and liquidity levels. 

How to read a cash flow statement

A cash flow statement is a financial report that shows where the money came from and how it was spent. The statements chart cash flow from one year to the next, by taking into account inflows and outflows of funds. Funds are considered “inflow” if they add to an organization’s savings, such as when a company receives payment for goods sold. In contrast, funds represent “outflows” when they subtract from an organization’s savings, which might happen when a company issues payroll checks or withdraws money for business operation costs. The bottom line on a cash flow statement is typically calculated by subtracting an organization’s total expenses from its total revenue – the result being the net change in cash between two years.

Understanding the key numbers 

The most important number on the cash flow statement is cash from operations, which is the sum of net income and depreciation. This number tells you how much cash a company generated from its normal business activities.

Cash flow from investing activities tells you how much cash a company generated or used from its investments, such as buying or selling property, stocks, or bonds. Cash flow from financing activities tells you how much cash a company received or paid out related to its financing activities, such as issuing new debt or issuing shares of common stock. The key takeaway is that the three numbers should always be in balance – cash from operations should be equal to cash from investing activities plus cash from financing activities. 

Summary

The statement is one of the main accounting reports of a company. It records all cash inflows and outflows and shows what the result of that cash flow was. Along with cash flow, other essential reports for the finances and accounting of a business are the Balance Sheet and the Income Statement for the Year.

All of them provide a complete overview of the company’s equity and performance. After all, it’s not enough to just look at your assets, the profit of your products or the results at the end of the month. You also need to know if you have enough cash to make day-to-day payments.

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