Cash Flow

Cash Flow & Cash Flow Statement

A cash flow statement is a financial statement that contains aggregated data and the value of all the cash inflows and outflows that a company receives from its current business operational, investing, and financing activities.

A detailed cash flow statement is crucial for investors, creditors, shareholders, vendors, regulators, taxing entities, and other interested parties to get a complete picture of all the business’ transactions. It is considered the most intuitive financial statement of any company, because it declares the cash generated by the business through three main channels:

  • operations
  • investment
  • financing

All three categories of cash flows are included in a company’s net cash flow statement, and the collective cash from these three sources represents the change in the total cash balance during the period.

Cash Flow Australia

Cash Flow From Operating Activities

The operating activities section relates to transactions involved in the production of goods and the delivery of services to customers. Operating activities consist of cash receipts and disbursements from transactions reported on the income statement related to current assets and liabilities, except those classified as investing or financing activities. Examples of operating activities include sales of products/services, payments to employees, inventory purchases, payments of accounts payable, and receipts of accounts receivable.

Cash Flow From Investing Activities

This section includes cash flows from the purchase or sale of non-current assets. Some examples of this include granting loans to related entities; purchasing or disposing of trading securities; acquiring or disposing property, plant, and equipment; and acquiring another entity using cash.

Cash Flow From Financing Activities

Financing activities include cash flows from non-current liability (creditor-oriented) and equity (owner-oriented) transactions. Examples include obtaining resources from creditors such as issuing bonds, notes, and other borrowings; payment of principal on amounts borrowed; obtaining resources from owners such as issuing stock; and providing owners with returns on investment, such as cash dividends or repurchasing stock.

Importance of Cash Flow Statements in Finance

A cash flow statement is an important financial statement for a company. It determines where they’re investing money, what the financing sources are, from where it’s generating its core revenue, and how much payment is made towards operating expenses.

As you can see, the cash flow statement is different than the income statement, which is concerned with finding the accounting profit of the company, and includes non-cash transactions.

If the company only looked at the income statement, they could find themselves in a tricky situation with no cash to fund operation and/or investments.

For example, a company that sells $100 worth of services and has $50 worth of expenses shows a profit of $50. However, the $100 sales (cash) won’t be received for 60 days (credit terms offered to their client), but the $50 in expenses has to be paid in 30 days, meaning the company can’t rely on its profits to pay its expenses in the short term and needs to use its cash savings.

Another example is if the company sees a profit of $100 each year. However, every five years, they need to buy a new machine for $1,000 to generate the income. Looking just at the accounting profit will lead the company to believe that the business is doing great, but in reality, they are not generating enough cash to fund the business sustainably. The cash flow statement identifies these potential issues by presenting the operating, investing, and financing activities.

Therefore, it is crucial for a business to maintain a detailed cash flow analysis and to keep track of all the cash inflows and outflows, as well as the timing of them.