A Cash Flow Statement/Report shows you how much cash is generated and used during a specific time frame within your business. It shows how cash is used in three main areas, Operating Activities, Investing Activities and Financing Activities, showing the total cash provided from or used by each activity and calculates the total change within the time frame, added to the opening balance to arrive at the closing cash balance.
The cash statement is used to compare cash from operations and net income which allows for analysis in the financial running of your business and allows you to see the actual amount of money your business receives from its operations.
• A cash flow statement is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company.
• The cash flow statement measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses.
• The cash flow statement complements the balance sheet and income statement.
Investing Activities
The Investing Activities section looks at changes in equipment, assets or investments. It is regularly shown as cash spend – for example, when cash is used to purchase or replace a piece of equipment. However, you can also see ‘cash in’ caused by investing if, for example, a company sells an asset in return for cash, also known as Scrappage Value.
Financing Activities
As the name suggests, this section relates to finance-driven changes to cash flow. These may be changes in debt, loans or dividends. This could be when capital is raised and cash enters the company, or it could be when dividends are paid out and cash leaves the company.
Operating Activities
This section of the statement reveals the amount of cash generated by a company’s products or services – in other words by its core business operations. Adjustments are made to net income in the income statement to reflect working capital changes, such as receivables, payables and inventories.
There are two methods to calculate cash flow from operating activities – the direct method and the indirect method. The former takes data from the income statement using cash receipts and cash disbursements related to operating activities. The net value of the two equates to the operating cash flow.
The indirect method converts net income to operating cash flow by adjusting for items that contribute to net income calculations but do not affect cash, such as depreciation and amortisation.
