What is a Statement of Cash Flow and How to Read it
I often hear from my clients: “My company has a positive net income but there is no money in the bank. Where did the money go?” Many business owners are familiar with the Profit and Loss Statement or Net Income Statement. There they can see if their company is profitable or not. However, the profit and loss statement does not give you a full picture of where your money is going. This is where a statement of cash flow comes in handy.
A cash flow statement is a financial report that provides information about the cash inflows and outflows of a business over a specific period of time, typically a month, a quarter, or a year. The statement is used to track the movement of cash within a business and helps to provide insight into a company’s liquidity and financial health.
Reading a cash flow statement requires a basic understanding of the three main sections of the statement: operating activities, investing activities, and financing activities.
Start by looking at the net cash flow from operating activities. The section represents the cash generated or used by the company’s core business operations. This can include payments to suppliers, payroll, and sales revenue A positive net cash flow from operating activities is generally a good sign, as it indicates that the company is generating cash from its operations.
Next, let’s look at the investing activities section. This section shows the cash inflows and outflows related to investments in long-term assets such as property, plant, and equipment, as well as other investments in securities or other businesses. If the company is investing heavily in its future growth, it may have significant cash outflows from investing activities.
The following section is the financing activities section. Here you can see the cash inflows and outflows related to financing activities, such as raising capital through debt or equity, paying dividends, or repaying loans. If the company is undergoing a major financing event, it may have significant cash inflows or outflows from financing activities.
Calculate the net change in cash by adding the cash inflows and subtracting the cash outflows from all three sections. This will give you an overall picture of whether the company generated or used cash during the period.
Look at the beginning and ending cash balances to see how much cash the company had at the beginning and end of the period. If the ending cash balance is higher than the beginning cash balance, it indicates that the company generated cash during the period. If the ending cash balance is lower than the beginning cash balance, it indicates that the company used cash during the period.
Compare the cash flow statement to the income statement and balance sheet to get a complete picture of the company’s financial health and performance. For example, if the company is generating positive net income but has negative net cash flow from operating activities, it may be using a lot of its cash to invest in future growth, for example purchasing a higher amount of inventory.
Understanding a cash flow statement can help you evaluate a company’s financial health and performance, identify potential risks and opportunities, and make informed investment decisions.
Is the prospect of understanding your cash flow still seem daunting? Make an appointment with one of our experienced advisors and we can take the weight of figuring out the cash flow situation off your shoulders.