Cash flow statement
The cash flow statement must be calculated by companies, as they are constantly faced with making strategic decisions. This largely determines the company’s ability to make investments. This is where the importance of the cash flow statement comes from, which we will discuss later in this article.
What is the cash flow statement and what is it used for?
The cash flow statement details a company ‘s cash movements over a given period, breaking down cash inflows and outflows. It is divided into three categories: operating activities, investing activities, and financing activities.
This type of report is very important in determining the liquidity of a company.
Key Objectives of the Cash Flow Statement
The cash flow statement has several key objectives that are essential to the financial management and analysis of a company:
Investment management
The cash flow statement helps managers and investors understand how the company’s resources are being used.
By providing a clear view of how your money is being invested, it makes it easier to make more informed decisions about future investments and growth strategies.
Liquidity analysis
Liquidity is essential for the survival of any business. The cash flow oman email list report indicates whether the company is able to generate the money needed to meet its short-term obligations.
Obtaining cash through operating activities
Operating activities are the primary source of cash for most businesses. This financial everything you need to know statement helps assess how well the company can generate cash through its sms To data regular operations.
Financing strategies
The company can determine whether it is using its debt and equity efficiently.
Evaluating financial decisions
By having concrete cash equivalents, this provides key information on investments in fixed assets and other long-term assets, as well as on sources of financing.
This is essential to decide whether a company is investing adequately in its growth or whether it is exceeding its financial capacity.
Components of the cash flow statement
The cash flow statement can be divided into three categories. Each of them represents a different type of financial activity:
Cash flow from operating activities
Operating activities include all transactions that are part of the company’s core business, such as selling goods and services, paying suppliers, and operating expenses.
Examples of operational activities
Some common examples of operating activities that affect cash flow include:
- Customer receipts and payments : money received from the sale of goods or services.
- Payments to suppliers : cash paid for the purchase of inventory or inputs needed to produce goods or services.
Cash flow from investing activities
Investment activities include transactions involving the purchase or sale of assets over long periods of time, such as real estate, furniture and equipment, as well as investments in other companies.
Calculation example:
- Purchase of property, plant and equipment (PPE): – €300,000 (outlay)
- Sale of a building: +150,000 € (income)
- Purchase of shares: -100,000 € (disbursement)
Net cash flow from investing activities = (€300,000) + €150,000 – €100,000 = – €50,000
In this example, net cash flow from investing activities is negative, indicating that the company has spent more on investments than it has received from asset sales or investments in the international community.
Cash flow from financing activities
Financing activities include all actions a company takes to raise funds, such as issuing stock, borrowing money, or distributing dividends to shareholders. This component of the cash flow statement reflects how the company is financing its operations and growth.
Examples of financing activities include issuing bonds, repaying loans, and distributing profits.
Ways to calculate the cash flow statement
There are two main methods for calculating it: the direct method and the indirect method.
Direct method
The method involves listing all income and expenses that relate to the company’s activities.
This method gives a more detailed reading of cash sources, but can be more complex to implement. Its formula is:
Operating cash flows = Customer collections − General payments
Indirect method
This starts with the company’s net income and adjusts this value for changes in the company’s equity or non-cash asset and liability accounts. The formula for determining it is: