What is a cash flow statement? 

A cash flow statement tells us the amount of cash entering and leaving the business. In other words, this statement gives an idea about how the finances in your account have changed this year as compared to last year. Cash flow statement uses figures from other two statements i.e income statement and balance sheet to assess cash utilization. Through a cash flow statement, you get an idea of how efficiently a company is managing its cash position and how much cash is needed to raise when you are running low on funds. Moreover, through cashflow statement a company can re-evaluate changes in assets, liabilities, and equity and how to fund its operating expenses.

A cash flow statement is prepared using three core activities:

  • Operating cash flows:

These are day-to-day expenses of a business that include buying and purchasing of goods, outflow of cash when you pay employees, suppliers, taxes, or interest. Non-cash items like depreciation are not included in the section. This is the direct method of calculating cash flows from operating activities. On the other hand, an indirect method of calculating cash flows involves using profit/loss as the base and then adjustments are made for items that affected the income statement but not the cash for example it includes adjustments for depreciation. 

Negative cash flows occur when a business spends more money than it actually makes. But it can be crucial to understand the reason behind this negative figure. It can be an alarming sign for some investors. However, it can be a positive sign for some since it shows the company has made some long-term investments and is positioning itself for future growth. 

  • Investing cash flows:

Cash flows from investing activities include purchase and sale of assets such as plants, building, furniture, machinery etc. This section typically involves cash payments made to acquire fixed assets, cash outflow due to disposal of an asset, investments made in shares etc. Long term investments made by the company are a part of this section and it feeds in the fixed assets of the balance sheet.

  • Financing cash flows:

Activities of a company that lead to a change in the size and composition of owner’s capital and borrowing of a firm is all a part of financing cash flow. Changes in long term liabilities like bank loans received is considered positive financing and when it is time to repay loans then that’s negative financing. Another source of positive financing cash flow is selling shares or going for IPO (initial public offering)

It is important to analyse all aspects of cashflow statements. This statement is of great interest to the investors. Operating and investing cashflows are focused mainly on evaluation of company’s cash related performance and financing cashflow is used to see how the business is financed in terms of bank loan or equity. In easy terms, we reconcile the difference of cash from last year to this year using cashflow statement.