The cash flow statement is one of three major financial statements that businesses are required to release. Along with the balance sheet and income statement, the cash flow statement offers good insight into how well a company is faring financially.
Also known as the statement of cash flows, the cash flow statement highlights the changes in a company's cash activity over a specified period of time. It helps investors understand how much money a company is making and spending, where that money is coming from, and how it's being spent. The cash flow statement covers three primary areas from which cash flows in and out of the business: operating activities, investment activities, and financing activities.
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Operating activitiesThe operating activities section of the cash flow statement measures how much cash a company makes and spends as a result of core operations. In other words, it shows how much cash is being generated by a company's products or services and how much cash is being spent to produce or deliver those products or services. Changes in cash flow from operating activities include accounts receivable, accounts payable, inventory costs, and depreciation.
Investing activitiesThe investing activities section of the cash flow statement highlights changes in cash outflow that result from capital expenditures such as new property, business vehicles, or equipment, as well as investment vehicles such as stocks and bonds. It also records changes in cash inflow that result from selling assets and cashing in investments.
Financing activitiesThe financing activities section of the cash flow statement records changes in cash flow as they relate to the business's efforts to raise capital. This section includes activities such as stock issuances, the repurchase of bonds, dividend payments, and loan payoffs.
Reading the cash flow statementIdeally, a company's cash flow statement will exhibit a positive cash flow. If a company is generating more cash than it's using, that means there's money left over to pay dividends, expand operations, or engage in other activities that increase the value of its stock, which is a good thing for shareholders and potential investors alike. Though negative cash flow is less desirable from an investment perspective, it doesn't necessarily mean that a company is in trouble. Rather, it could be that the company is using its cash to grow the business, rather than leaving it sitting in the bank. For this reason, it's important to consider how a company's cash flow looks over time, as opposed to basing an investment decision on a single snapshot. Additionally, investors should review the cash flow statement in conjunction with a company's income statement and balance sheet to get the clearest picture of how it's doing financially.
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