Cash Flow Statements – what do they teach us?

When it comes to getting an accurate idea of your company’s financial performance and overall health, there are three main financial documents that you should look over. These documents include the balance sheet and income statement of your business, as well as the cash flow statement.

The cash flow statement provides detailed information regarding the inflow and outflow of cash into your business over a specific time period. Basically, it allows you to see how your company is spending its money and where that money is coming from. The cash flow statement is an effective resource for testing your company’s liquidity and determining its short-term viability because it shows the changes of your cash flow over time instead of a set dollar amount at a specific point in time. The following are some of the details that a cash flow statement will provide:

Operating Activities

Your operating activities represent the main source of your company’s cash generation. It’s probably the most important section of your cash flow statement. Basically, the operating activities section outlines how much cash is being generated by your company’s main products and/or services. If you have a strong, positive cash flow over time, it means that your company is in good financial condition.

Operating Activities displays two main numbers – the company’s net income and the net cash provided by operating activities. If the operating revenues and expenses of your business were all in cash, then these two figures will be the same. However, if this isn’t the case, then your net income figure will have to be adjusted based on an increase or decrease in cash, which is determined from the changes on your balance sheet.

Investing Activities

The investing activities section refers to any changes in assets, equipment or investments. Any cash changes that result from investing are typically referred to as “cash outflows” since cash is used to invest in short-term or long-term assets (such as buildings or equipment). If you divest an asset, then it’s referred to as a “cash inflow.” Cash outflows are generally a sign of good financial health since most successful or growing businesses continually invest in equipment, land and other long-term, fixed assets.

Financing Activities

The financing activities section of your cash flow statement refers to all changes in debt, long-term borrowings and loans or stock options. When capital is raised, it will be referred to as “cash-ins,” whereas if debt is reduced or dividends are paid, it will be referred to as “cash-outs.” This section gives you a good idea of how any borrowing that you have done affects the cash flow of your business.

The Bottom Line

The bottom line section is exactly what it sounds like. It’s either the net increase or decrease in cash and cash equivalents. The bottom line is determined through the calculation of total cash inflows and outflows of the operating activities, investing activities and financing activities.

Supplemental Information

This section includes the exchange of significant items that don’t involve cash, such as the exchange of company stock for company bonds.

These are just some of the things that a cash flow statement will tell you about the financial health of your company. Keep in mind that a cash flow statement reflects the liquidity of your business and not the profitability, which is something you can determine using your income statement. If you are in need of professional accounting and bookkeeping services, be sure to contact us at Valezar & Associates for more information today.