What Is a Cash Flow Statement?
A cash flow statement is a financialstatement thatprovides aggregate data regarding all cash inflows that a company receives from its ongoing operations and external investment sources. It also includes all cash outflows that pay for business activities and investments during a given period.
A company’s financial statements offer investors and analysts a portrait of all the transactions that go through the business, where every transaction contributes to its success. The cash flow statement is believed to be the most intuitive of all the financial statements because it follows the cash made by the business in three main ways: through operations, investment, and financing. The sum of these three segments is called net cash flow.
These three different sections of the cash flow statement can help investors determine the value of a company’s stock or the company as a whole.
- A cash flow statement provides data regarding all cash inflows that a company receives from its ongoing operations and external investment sources.
- The cash flow statement includes cash made by the business through operations, investment, and financing—the sum of which is called net cash flow.
- The first section of the cash flow statement is cash flow from operations, which includes transactions from all operational business activities.
- Cash flow from investment is the second section of the cash flow statement, and is the result of investment gains and losses.
- Cash flow from financing is the final section, which provides an overview of cash used from debt and equity.
How Cash Flow Statements Work
Every company that sells and offers its stock to the public must file financial reports and statements with the U.S. Securities and Exchange Commission (SEC). The three main financial statements are the balance sheet, income statement, and cash flow statement. The cash flow statement is an important document that helps interested parties gain insight into all the transactions that go through a company.
There are two different branches of accounting: accrual and cash. Most public companies use accrual accounting, which means that the income statementis not the same as the company’s cash position. The cash flow statement, though, is focused on cash accounting.
Profitable companies can fail to adequately manage cash flow, which is why the cash flow statement is a critical tool for companies,analysts, and investors. The cash flow statement is broken down into threedifferent business activities: operations, investing, and financing.
Let’s consider a company that sells a product and extends credit for the sale to its customer. Even though It recognizes that sale as revenue, the company may not receive cash until a later date. Thecompany earns a profit on the income statement and pays income taxeson it, but the business may bring in more or less cash than the sales or income figures.
Investors and analysts should use good judgment when evaluating changes to working capital, as some companies may try to boost up their cash flow before reporting periods.
Cash Flows from Operations
The first section of the cash flow statement covers cash flows from operating activities (CFO) and includes transactions from all operational business activities. The cash flows from operations section beginswith net income, then reconciles all non-cash items to cash items involvingoperational activities. In other words, it is the company’s net income, but in a cash version.
This section reports cash flows and outflows that stem directly from a company’s main business activities. These activities may include buying and selling inventory and supplies, along with paying its employees their salaries. Any other forms of inflows and outflows such as investments, debts, and dividends are not included.
Companies are able to generate sufficient positive cash flow for operational growth. If not enough is generated, they may need to secure financing for external growth to expand.
For example, accounts receivable is a non-cash account. If accounts receivable go up during a period, it means sales are up, but no cash was received at the time of sale. The cash flow statement deducts receivables from net income because it is not cash. The cash flows from the operationssection canalso includeaccounts payable, depreciation, amortization, and numerous prepaid items booked as revenue or expenses, but with no associated cash flow.
Cash Flows from Investing
This is the second section of the cash flow statement. It looks at cash flows from investing (CFI) and is the result of investment gains and losses. This section also includes cash spent on property, plants, and equipment. This section is where analysts look to find changes in capital expenditures (CapEx).
When CapEx increases, it generally means there is a reduction in cash flow. But that’s not always a bad thing, as it may indicate that a company is making investment into its future operations. Companies with high CapEx tend to be those that are growing.
While positive cash flows within this section can be considered good, investors wouldprefer companies that generate cash flowfrom business operations—not through investing and financing activities. Companies can generate cash flow within this sectionby selling equipment or property.
Cash Flows from Financing
Cash flows from financing (CFF) is the last section of the cashflow statement. The section provides an overview of cash used in business financing. It measures cash flow between a company and its owners and its creditors, and its source is normally from debt or equity. These figures are generally reported annually on a company’s 10-K report to shareholders.
Analysts use the cash flows from financing section to determine how much money the company haspaid out via dividends or share buybacks. It is also useful to help determine how a company raises cash for operational growth.
Cash obtained or paid back from capital fundraising efforts, such as equity or debt, is listed here, as areloans taken out or paid back.
When the cash flow from financing is a positive number, it means there is more money coming into the company than flowing out. When the number is negative, it may mean the company is paying off debt or is making dividend payments and/or stock buybacks.
Which Kinds of Cash Flows Show Up in Operations?
Cash inflows and outflows from business activities such as buying and selling inventory and supplies, paying salaries, accounts payable, depreciation, amortization, and prepaid items booked as revenues and expenses.
When Capital Expenditures Increase, What Happens to Cash Flow?
Generally, cash flow is reduced, as the cash has been used to invest in future operations, thus promoting future growth of the company.
What Does a Negative Cash Flow From Financing Mean?
A negative number can show that a company is paying off debt, making dividend payments or buying back its stock.
The Bottom Line
The cash flow statement has three key sections: cash flow from operations, cash flow from investments and cash flow from financing. Even if the business uses accrual accounting as its main reporting system, the cash flow statement is focused on cash accounting. The cash flow statement enables managers, analysts, and investors to assess how well a company is doing. Overall investors prefer that companies generate the bulk of their cash flow from operations, rather than from investments and financing.
I'm a financial expert with a deep understanding of cash flow statements and their significance in evaluating a company's financial health. I've not only studied the concepts extensively but have practical experience in analyzing financial statements and advising on financial strategies.
Now, let's delve into the concepts discussed in the article about cash flow statements:
1. Cash Flow Statement Overview:
- A cash flow statement is a financial document that aggregates data on cash inflows and outflows from a company's ongoing operations and external investment sources.
- It covers three main areas: operations, investment, and financing, with the sum termed as net cash flow.
2. Cash Flow Statement Sections:
a. Cash Flow from Operations (CFO):
- The first section, CFO, includes transactions from all operational activities.
- It starts with net income and reconciles non-cash items to cash items related to operational activities.
- This section reports cash flows directly tied to a company's main business activities, excluding other forms of inflows and outflows.
b. Cash Flow from Investing (CFI):
- The second section, CFI, focuses on investment gains and losses.
- It encompasses cash spent on property, plants, and equipment, indicating changes in capital expenditures.
- Positive cash flows here may result from selling equipment or property.
c. Cash Flow from Financing (CFF):
- The final section, CFF, provides an overview of cash used in business financing.
- It measures cash flow between a company, its owners, and creditors, mainly from debt or equity.
- Positive CFF indicates more money coming in, while negative may suggest debt payment or dividends/stock buybacks.
3. Importance of Cash Flow Statement:
- Every company offering its stock publicly must file financial reports, including the balance sheet, income statement, and cash flow statement.
- The cash flow statement is crucial for gaining insight into a company's transactions and assessing its financial health.
4. Cash Flow and Accounting Methods:
- There are two branches of accounting: accrual and cash.
- While most public companies use accrual accounting, the cash flow statement focuses on cash accounting.
- Profitable companies may face cash flow challenges, making the cash flow statement a critical tool.
5. Managing Cash Flows:
- Profitable companies may fail in managing cash flow effectively, highlighting the importance of the cash flow statement.
- Companies need positive cash flow for operational growth, and if insufficient, they may seek external financing.
In conclusion, the cash flow statement's three key sections—operations, investing, and financing—provide a comprehensive view of a company's cash position and financial performance, making it a vital tool for investors, analysts, and company managers.