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Examining Cash Flow Statements: What They Are and What They Tell Us
If you’re looking at your best friends bank statement, there’s quite a few things you could learn about them, right? I'm not suggesting you ask to see your friend's bank statements, but you’d be able to see how well they prioritize savings, what type of things they value, where the majority of their money is going, and where their money is coming in from.
This is exactly what the cash flow statement is.
It's a record kept of all the money coming in and going out of a company. It is broken down into three sections: the operating activities, the investing activities, and the financing activities.
Operating Activities
This is where the money coming in from the regular activities of the business is listed. It is the money from selling your products or services. There are two ways to see these operating activities, directly or indirectly. The direct method tracks all of the cash coming in and out, using actual cash to determine the inflows and outflows. The indirect method takes net income, and then adds back the noncash items to land at the cash-based number.
Investing Activities
Investing activities are the money earned from investments. Machinery can be included as an investment. Investment securities or the sale of assets and securities are also mentioned in the investing activities portion of the cash flow statement. If your overall cashflow statement number is negative, this is most likely due to poor company performance. However, if cash from your investing activities is negative, this could be due to long-term investments that you won’t quickly see a return on. Research and development is a common investment for companies, where the return is rather long, but this can be a really good thing in the long run.
Financing Activities
The financing activities section on the cash flow statements is where all of the transactions to run the business are placed. This includes debts to be paid, equity, and dividends. The formula used to find this number is
CFF = CED − (CD + RP)
CED: Cash inflows from issuing equity or debt
CD: Cash paid as dividends
RP: Repurchase of debt and equity
This is a common formula that investors, stockholders, or analysts will use to determine the strength of the company. It's important for investors to have an idea of how well the company is doing financially, and how it is using its cash. The cash flow statement is a great place to get this information because it will help paint the picture of how well operations are run within the organization.
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