Cash Flow Statement

What Is A Cash Flow Statement?

A cash flow statement, also known as a statement of cash flow, is one of the main financial statements, along with the income statement and the balance sheet, that companies are required by securities regulators to prepare to demonstrate their financial condition.

The cash flow statement is important because it shows investors and creditors how well a company manages its cash and that it has adequate amounts of money available to pay its bills. The cash flow statement shows the difference in the amount of cash a company has at the beginning of a period (its opening balance) and the amount at the end of that period (the closing balance). It also shows where the money is coming from and where it is going.

Cash flow can be positive or negative depending on the amount of disbursements the company makes and the cash it takes in during the period, usually a quarter. A negative cash flow doesn't necessarily mean that a company is losing money. It could simply mean that the company disbursed a lot of money during the period, such as investing in a new factory or other expansion. However, persistent negative cash flow could signal a serious financial problem. Alternatively, a healthy cash position at one time doesn't mean the firm is very profitable. Likewise, a profitable company doesn't always have a positive cash flow.

Cash Flow Doesn't Equal Profitability

Cash flow doesn't measure a company's profitability; that's what the income statement shows. A cash flow statement doesn't include debt; it only measures when cash comes in and goes out. It also doesn't measure when a company makes a sale or buys something, only when the cash is actually taken in or disbursed.

For example, if a customer orders something but is billed for it later, the transaction isn't included in cash flow until they actually pay for it. Similarly, if the company orders something on credit, it doesn't count as a cash disbursement until it pays the bill.

Cash flow can be increased by selling more products or services, selling an asset, collecting bills faster and paying them slower, and taking out a loan.

Three Sections Of A Cash Flow Statement

The cash flow statement is divided into three sections: cash flows from operating activities, investing activities and financing activities.

Operating Activities

This section shows the cash collected during the period from the sale of the company's products and services. On the disbursement side, it shows such things as rent payments, salaries, interest payments, taxes, cost of goods sold, supplies, utilities, marketing expenses and the like.

Investing Activities

This section shows the amount of cash going out and coming in from the purchase and sale of long-term assets, meaning those expected to last more than one accounting period.

Financing Activities

This section shows the cash generated from the sale of stock or by taking out loans. Cash disbursements in this section show things such as dividend payments to stockholders and the payoff of debt principal.

Summary

A cash flow statement is a financial statement required by publicly-traded companies to produce for investors, usually quarterly. Cash flow is not the same as net income, as it shows the company's actual cash inflow and outflow during the period, not profitability. As a result, cash flow can be positive or negative for any given period, although persistent negative cash flow can be a sign of financial problems.