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Statement of Cash Flows - Definition and Detailed Explaination

Updated: Nov 30, 2023


What is Cash flow statement?

Cash flow statement also referred to as Statement of Cash Flows is one of three main financial reports that are generated regularly. It is used to show how much cash the company has on hand during a specific period of time. The cash flow statement provides all cash inflows and outflows of the company through 3 main areas operations, investment, and financing. By analyzing this statement, the company’s stakeholders such as investors, banks, shareholders, even potential staff could have a more accurate picture of the health of the company.



Cash flows could be expressed as the investment of cash into or out of an account, a business, or an investment. Those include Cash Inflow and Cash Outflow. Cash Inflow is money coming into the business’ possession. It could be revenue from customers to whom we sold goods, liability from the bank, or money from investors. On contrary, Cash Outflow is the money going out of the business. It could be used to pay payroll expenses, pay bills from vendors, or pay back loans to banks. At the bottom line, the net cash flow is calculated by subtracting cash outflow from cash inflow. If the figure is Positive, the total money coming into the business exceeds the amount coming out. If the figure is Negative, it is not a sign of good financial health.


Why is Cash flow statement important?

First, the Cash flow statement could show the company’s liquidity. That means the company’s owner knows correctly how much money they could you if needed. Therefore, they can consider what they can afford and what cannot.

Second, the Cash flow statement shows changes in Assets, Liabilities, and Equity in the form of cash flows.

Third, the Cash flow statement lets the company’s owner forecast future cash flows and plan how much liquidity the company could have in the future. That’s important for making long-term plans.



 

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The Net Cash Flow: A Key Indicator of Financial Health

Here, we examine how net cash flow is calculated and what it reveals about a business's financial status. The focus is on understanding the implications of a positive or negative net cash flow and its impact on business sustainability.


Beyond the Cash Flow Statement: A Holistic Financial Perspective


While the cash flow statement is a powerful tool, it's not infallible. This section advises on the complementary use of balance sheets and profit and loss statements for a more comprehensive view of a company's financial health, particularly in assessing the sustainability of cash sources.


Example for Cash Flow Statement


From this Cash Flow Statement (CFS) for the year ended December 31, 2023, we observe a net cash flow of $38,000

Category

Amount ($)

Cash Flow from Operating Activities:

Net Income

50,000

​Adjustments for:

Depreciation

5,000

Increase in Accounts Receivable

​(3,000)

Net Cash Provided by Operating Activities

52,000

Cash Flow from Investing Activities:

Purchase of Equipment

(20,000)

Net Cash Used in Investing Activities

(20,000)

Cash Flow from Financing Activities:

Issue of New Shares

10,000

Dividends Paid

(4,000)

Net Cash Provided by (Used in) Financing Activities

6,000

Net Increase in Cash

38,000

Cash at Beginning of Period

12,000

Cash at End of Period

50,000

From this Cash Flow Statement (CFS) for the year ended December 31, 2023, we observe a net cash flow of $38,000. This positive cash flow is primarily driven by the company's operational activities, which is a positive indicator for investors. It suggests that the core business operations are efficient in generating revenue. The fact that the majority of cash flow comes from operations, rather than financing or investing activities, implies that the company is effectively managing its core business and maintaining healthy liquidity to sustain and grow its operations. This is a crucial factor in assessing the company's financial stability and future growth potential.


Although the Cash flow statement could show us a clear view of what we've paid and what remained, it is not recommended to analyze the Cash flow statement only. The reason is that if most of the money inflows the business come from Debt, the business is in financial trouble now. The advice is to use Balance Sheet analysis (to know all money and debts) and Profit and Loss analysis (to know all amounts in and out to support the business) in conjunction with the Cash flow statement. As a result, you can see a whole picture of the financial health of the business whether cash is available for the company to function.


Conclusion

The concluding part reiterates the value of the cash flow statement as an indispensable component of financial analysis and strategic planning. It encourages readers to integrate these insights into their business practices for enhanced financial acumen and decision-making.


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