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What is a cash flow statement?

Capitalise Aug 17, 2023

A cash flow statement offers a detailed snapshot of a company's cash inflows and outflows during a specific period. Whether you're a business owner, an investor, or simply someone looking to understand financial statements, this article will break down the essentials of a cash flow statement and explain why it's a crucial aspect of financial analysis.

 

Cash flow statement meaning 

A cash flow statement is a financial statement that provides a clear and concise overview of a company's cash movements over a specified period, typically a fiscal quarter or year. 

It should show how cash enters and exits the company through its operational, investing, and financing activities. The statement will help stakeholders understand the sources and uses of cash within an organisation, giving a more accurate picture of its financial health, than just examining profit or loss figures.
 

Key components of a cash flow statement

A typical cash flow statement is divided into three main sections, each outlining the different aspects of a company's cash flows:

Operating activities

This section covers the company's core business operations, detailing cash transactions related to the production and delivery of goods or services. It includes items like cash received from customers, payments to suppliers, and payments to employees. A positive cash flow from operating activities is generally a positive indicator of a company's ability to generate cash from its day-to-day operations.

Investing activities

Here, the cash flow statement outlines cash flows associated with the acquisition or disposal of long-term assets. This includes purchases and sales of property, equipment, investments, and other assets not considered part of the company's core operations. A significant negative cash flow in this section might indicate heavy investment in the company's future growth.

Financing activities

This section reveals the company's transactions with its owners and creditors. It includes cash flows related to raising capital, repurchasing stock, paying dividends, and servicing debt, such as any business loans. Financing activities can give insights into how a company is funded and its relationship with shareholders and lenders.

 

Why is a cash flow statement important?

Understanding a cash flow statement is important for several reasons:

  • A realistic financial picture

While a profit and loss statement reflects profitability, it doesn't account for cash movements. A company can be profitable but still experience cash shortages due to delayed payments or high investments. The cash flow statement provides a clearer view of actual cash availability.

  • Assessing sustainability

By analysing the cash flow statement, investors and analysts can evaluate whether a company's cash flows are sustainable over the long term. Positive cash flow is a sign that a company is generating enough cash to cover its operating expenses.

  • Financial planning

The statement helps businesses plan for future investments and manage their cash more effectively. It identifies periods where there may be a cash flow gap, allowing the business to take proactive measures, such as applying for a business loan.

  • Lender and investor confidence

Lenders and investors sometimes review a company's cash flow statement to assess its ability to repay debts and generate returns on investments. A healthy cash flow can improve a company's creditworthiness and attractiveness to potential investors.
 

The cash flow statement can be a useful tool for understanding the financial health of a company beyond the numbers presented in other financial statements. As a business owner, mastering the basics of a cash flow statement can provide you with a more comprehensive understanding of your company’s financial performance and future prospects.

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