If you’re like most people, the mere mention of a cash flow statement probably sends you running for the hills. But trust us, it doesn’t have to be that way! A cash flow statement is one of the most important financial statements for a business, yet it is often one of the most misunderstood. In this blog post, we will take a deep dive into how to read and interpret a cash flow statement so that you can gain a better understanding of your business’s financial health.
What Is a Cash Flow Statement?
A cash flow statement is a financial document that shows how much cash a company has generated or used during a specific period of time. The statement usually covers a period of one year but can also be shorter or longer.
A cash flow statement can help you understand a company’s financial health. It is important to read and interpret a cash flow statement correctly so that you can make informed investment decisions.
What Is Included in a Cash Flow Statement?
The cash flow statement has three main sections: operating activities, investing activities, and financing activities.
Operation Cash Flow Activities
Operating cash flow activities are those that are related to a company’s primary business activities. This includes things like cash receipts from customers, cash payments to suppliers, and cash payments for operating expenses.
Most businesses need cash to operate, and the primary activities that generate cash for a business are typically categorized as operating activities on the cash flow statement.
Investment Cash Flow Activities
Investment cash flow activities are those that involve the outflow of cash to purchase investments, such as stocks, bonds, and real estate. These activities are important to monitor because they can have a significant impact on a company’s financial health.
There are two types of investment cash flow activities: capital expenditures and acquisitions. Capital expenditures are funds that are used to purchase long-term assets, such as property, equipment, or buildings. Acquisitions are purchases of other businesses or assets, such as patents or customer lists.
Investment cash flow activities can be positive or negative. Positive investment cash flow occurs when a company receives more money from these activities than it spends. Negative investment cash flow happens when a company spends more on these activities than it receives.
Monitoring investment cash flow is important because it can give insights into a company’s future prospects. For example, if a company is consistently spending more on capital expenditures than it is bringing in from acquisitions, then this may be a sign that the company is having difficulty growing its business. On the other hand, if a company is generating positive investment cash flow, then this may be an indication that the business is healthy and has good potential for growth.
Financing Cash Flow Activities
The financing cash flow activities section of a company’s cash flow statement shows the cash inflows and outflows related to a company’s long-term debt and equity. This section can be further divided into two subsections: long-term debt and equity.
The long-term debt subsection shows the cash inflows and outflows related to a company’s long-term debt obligations. This section includes items such as principal repayments, interest payments, and any other associated fees.
The equity subsection shows the cash inflows and outflows related to a company’s equity instruments. This section includes items such as dividends paid, share repurchases, and new equity issuance.
How Do I Calculate and Prepare My Cash Flow Statement?
To calculate your cash flow statement, you will need to gather information from your business’s accounting records. This includes your income statement and balance sheet. You will also need to know your beginning and ending cash balances for the period you are calculating.
Once you have this information, you can begin to prepare your cash flow statement. There are three sections to a cash flow statement: operating activities, investing activities, and financing activities.
Operating activities are the day-to-day operations of your business that generate revenue and incur expenses. This section will show you the net cash generated or used by your business during the period.
Investing activities are those that involve the purchase or sale of long-term assets such as property or equipment. This section will show you the net cash generated or used by your business from these activities.
Financing activities are those that involve borrowing money or repaying debt. This section will show you the net cash generated or used by your business from these activities.
Once you have prepared all three sections of your cash flow statement, you can then total them to get your overall net cash flow for the period. This number will tell you whether your business had positive or negative cash flow during the period.
How Do I Read My Cash Flow Statement?
Assuming you have a basic understanding of accounting, reading a cash flow statement is not difficult. The cash flow statement shows a company’s inflows and outflows of cash, which is helpful in understanding a company’s financial health.
As we have already explained, there are three sections in a cash flow statement: operating activities, investing activities, and financing activities.
The first step in reading a cash flow statement is to find the net change in cash for each section. To do this, simply subtract the total amount of cash going out from the total amount of cash coming in. For example, if a company had $10 million in operating expenses and $15 million in revenue from sales, then its net change in operating cash would be $5 million.
Next, look at the ending balance for each section. This will give you an idea of how much cash on hand a company has at the end of its reporting period. A positive ending balance means the company has more cash than it did at the beginning of the period; a negative ending balance means the company has less cash than it did at the beginning of the period.
Finally, compare the net change in cash for each section to the company’s overall net change in cash. This will give you an idea of where the company is generating (or using) its cash.
How Often Should I Look at My Cash Flow Statement?
It’s important to review your cash flow statement regularly, as it can give you insights into the overall health of your business. A cash flow statement shows how much cash is coming in and going out of your business over a period of time. This information can be helpful in identifying trends and making decisions about how to allocate your resources.
Ideally, you should review your cash flow statement at least once a month. This will allow you to track progress and make adjustments as needed. If you have any major changes in income or expenses, it’s important to take a closer look at your cash flow to ensure that everything is on track.
Why Is My Cash Flow Statement Important for my Business?
A business cash flow statement is a financial statement that provides a snapshot of a company’s incoming and outgoing cash during a specific period of time. The purpose of the cash flow statement is to give readers an understanding of the company’s ability to generate and use cash, which is important in assessing its financial health.
One key metric that cash flow statements can provide is called “operating cash flow,” which measures the amount of cash generated from a company’s normal business operations. This number can be useful in assessing whether a company has enough cash on hand to cover its short-term expenses and debts.
Another key metric is “free cash flow,” which measures the amount of cash a company has left over after it has paid for all of its operating expenses and capital expenditures (such as new equipment or property). Free cash flow is important because it represents the money that a company can use to pay dividends, make share repurchases, pay down debt, or reinvest in its business.
Overall, the goal of reading and interpreting a cash flow statement is to get a better understanding of how a company is generating and using its cash. By reviewing this information on a regular basis, businesses can make more informed decisions about where to allocate their resources and how to manage their finances.
Conclusion
There you have it! These are the basics of how to read and interpret a cash flow statement. By understanding the different parts of the statement and what they represent, you’ll be able to get a better sense of a company’s financial health. And armed with this knowledge, you’ll be one step closer to making smart investment decisions.
