Cash Flow Statement Analysis: Comprehensive Study

Cash flow statement explains companies cash activities in business and shows how cash is being used under different expenditure heads and areas from where companies cash inflow takes place. In simple words it’s a statement reflecting cash inflow and outflow of business concern.


Why it is important:

To understand the real movement of cash and use of cash in a business cash flow statement show far better clarity in transactions made during the year. Often balance sheet and income statement of companies consist of huge amount of Accounts Receivables and Payables and not necessarily show how much of cash being generated or how much it may eventually be written off as bad debt. Off course Accounts Receivables and Payables Ratio help to understand the days company takes to manage it key cash flow requirement, same time deep analysis of cash flow statement gives instant clarifications of movement of cash during the year and its consequences.


Components of Cash Flow:

Cash Flow Statement consists of three major Heads

Cash Flow from Operating Activities

Cash Flow from Investing Activities and

Cash flow from Financing Activities


Cash Flow Statement Components Analysis:

Cash Flow from Operating Activities

Cash flow from Operations shows how much real cash is been generated from sales during the year and where all the cash is being utilized to carry out operations.

This includes purchase of raw material, Salary to staff, Sales proceedings, Depreciation, promotional expenses etc... all that is directly linked to run its day to day core business activity.

Robust Cash flow from operations shows companies ability to fund its future capex plans based on its internal accruals and Negative Cash flow from Operations shows the company may need to depend every time on external borrowing to finance its growth plans. This again depends on number of factors like weather the company is in growth stage or at saturation stage, at growth stage negative cash flow from operation is not bad given the growth prospects and management efficiency to keep the growth moment. Negative cash flows for the grown up large companies is a bad sign and shall put companies in heavy burden to borrow and service its expansion or plant repaid needs or any other major CapEx plans.


Cash Flow from Investing Activity:

Cash flow from Investing activities mainly include sale and purchase of fixed assets. Negative cash flow from investment activates are not bad if fact they most often show that the company is in growth stage and in expansion mode and investing to scale up its offerings. On the other side sometimes on annual financial statements you can find extraordinary gains the company has reported. This may not be a continuous event and may be a result of liquidating some of its assets or businesses, this income should be treated and adjusted as one-time gain. Such evets may result in positive Investing Cash flows during the year. This is a good sign if a company is focusing back on its core offerings and liquidating its subsidiaries which are not in line with its long-term vision and brand positioning. Or in cash the company is going under restructuring its operations.


Cash Flow from Financing Activities:  

Cash flow under this head includes mainly outflow in terms of payment to borrowed finance (Debt) and Inflow of cash by way of issue of shares, bonds etc... This activity contributes positively to Cash flow statement of grown up companies where one can see good amount of cash reserves. Cash Flow from Financing activities are investing in stocks, bonds other marketable securities and financing subsidiaries etc... to make additional income other than revenue from its core operations. The investment made during the year is recorded as cash outflow and sale and payments received in terms of share application money, dividends and returns are cash inflows.

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