Cash Flow Summary

The cash flow statement summarizes all the cash that enters or exits the business. It adds inflows into the company and subtracts outflows from the company. If the equation is positive the business is said to be cash flow positive, if negative the company is said to be cash flow negative. Only operations that deal with cash are included, unpaid purchases or owed payments are not. Cash flow depends totally on cash earned versus cash spent by the company. In order for this statement to be more manageable, it is split into three separate sections. These sections are Cash Flow from Operations, Cash Flow from Investments, and Cash Flow from Financing.

Cash Flow from Operations

Cash Flow from Operations is a record of all cash that enters or exits the company from common business operations. It begins with net income and eliminates all depreciation and non-cash charges, and increases or deducts from the cash pool based on business relevant expenses and incomes. This display of liquid cash only transactions allows you to see if the company is earning cash, or spending it, before factoring in investments or financing.

Cash Flow from Investments

Cash Flow from Investments is the window into cash earned or spent on all investments made by the company. Note that this does not include cash investments made into the company, which is displayed in Cash Flow from Financing. A sale or a maturity of an investment results in a cash inflow, and the purchase of future investments display a cash outflow. This only deals with cash, so the write-off of an investment or a revaluation of an investment does not adjust this figure. The incoming cash flow should be compared to outflows from previous years to ensure that investment is paying off for the company.

Cash Flow from Financing

Cash Flow from Financing displays cash inflows or outflows in relation to the two external sources of funding, investments or loans. This section of the cash flow statement shows cash inflows from loans taken by the company or treasury shares sold by the company. It displays cash outflows to pay loans owed by the company, repurchase of shares from investors, and payments of dividends to investors.

Purpose of Cash Flow Statement

The Cash Flow statement displays whether liquidity is increasing in the company or leaving it. Liquid cash helps the business in the short term, allowing it to pay off immediate bills and continue operations. It allows the company to arrive at its long term goals instead of stalling or dying short term. There is no purpose in having a large profit if there is not enough cash to pay the short term bills. This often happens to companies that are low on cash and high on accounts receivables especially accounts receivables scheduled to be paid after the next wave of bills come due.

A passive benefit to these statements is modification difficulty. It is far easier to manipulate the reported earnings with legitimate manipulations than it is to manipulate the appearance of cash flow. Additionally, it must be reconciled with the income statement and bridges that document to the balance sheet, which makes it harder to edit.