Procurement Glossary & Terminologies

What is Cash flow statement ?

A cash flow statement is valuable for managing finances since it tracks an organization’s money flow. Making a cash forecast is typically beneficial for facilitating short-term planning. This report is one of the three crucial factors that determine a company’s performance, along with the income statement and balance sheet.

The cash flow statement lets you keep track of incoming and departing cash by displaying the source of that money. An organization’s operational, investment, and financial operations generate cash flow. The statement also provides information on investments, business-related expenses, and cash withdrawals at a specific time. The knowledge you obtain from the cash flow statement helps managers make wise decisions for managing business operations. Businesses typically strive for a healthy cash flow because they risk borrowing money to keep the company afloat without it.

Importance of Cash flow statement

A company should have enough cash in hand at all times to succeed. This makes it possible for it to pay back bank loans, purchase commodities, or make profitable investments. If a company doesn’t have enough cash to fulfill its debts, it is declared bankrupt. The following are some advantages of a cash flow statement:

1. Provides information about spending: A cash flow statement explains in detail the principal payments made by the business to its creditors. Additionally, it displays cash-only transactions not represented in the other financial statements. These include buying inventory, giving customers credit, and investing in capital equipment.

2. An organization’s operational, investment, and financial operations generate cash flow. The cash flow statement lets you keep track of incoming and departing cash by displaying the source of that money. The statement also provides information on investments, business-related expenses, and cash withdrawals at a specific time. The knowledge you obtain from the cash flow statement helps managers make wise decisions for managing business operations.

3. Emphasis on cash generation: By creating cash, profit is essential to a company’s growth. There are, however, several additional ways to earn money. For instance, a business makes money when it can buy equipment for less. Every time it collects accounts receivable from its clients more quickly than usual.

4. Short-term planning-friendly: A cash flow statement is crucial for managing cash flow. A successful company must always have enough cash to cover immediate responsibilities like upcoming payments. To make critical judgments, a financial manager can examine the incoming and outgoing funds from previous transactions. Some circumstances where decisions must be made based on cash flow include anticipating a financial shortfall to pay off obligations or setting up a base to apply for bank credit.

Structure of a cash flow statement

The following are the critical elements of the cash flow statement:

1. Cash Flows from Operations The cash flows from operating activities contain transactions from all operational business activities. The net income serves as the business’s beginning point for cash flows. Then reconciles all non-cash items to cash items comprising operational activities. In other words, the business’s net income is shown in cash.

The cash flows that are directly connected to a company’s primary business operations are described in this section. These tasks include paying employees’ salaries, purchasing and selling goods and inventories, etc. Investments, debts, and dividends are not counted as additional inflows or outflows.

Companies can produce enough positive cash flow to support operational expansion. They could need funding for external growth to grow if insufficient revenue is created.

2. Income from Investments The cash flows from investing (CFI), which are the outcome of investment gains and losses, are examined in the second section of the cash flow statement. Cash spent on real estate, machinery, and equipment is also included in this part. In this section, analysts search for capital expenditures (CAPEX) variations.

Companies with significant CAPEX are frequently expanding businesses. Generally speaking, a rise in CAPEX indicates a decline in cash flow. However, it’s not always bad because it could mean a company investing in its future operations.

Investors prefer businesses that produce cash flow from business operations rather than investing and financing activities, even though positive cash flows in this section can be seen as favorable. Companies can have cash flow in this area by selling assets like property or equipment.

3. Flows of Cash from Financing The cash flow statement’s final section is titled cash flows from financing (CFF). An overview of how cash is used in business finance is given in this section. It gauges the movement of money between a business’s owners and creditors, and its funding typically comes from debt or equity. Typically, a company’s 10-K report to shareholders includes these numbers.

Analysts use the cash flows from the finance section to calculate the number of dividends and share repurchases the company has made. Finding out how a company obtains funding for operational expansion is also helpful.

Here, cash collected or returned from capital fundraising activities, including equity, debt, and loans, are taken out or paid for.

When the financial cash flow is favorable, more money comes into the business than is leaving it. If the number is negative, it could indicate that the company is repurchasing stock or paying down debt.