How to read a cash flow statement
Statements of cash flows are typically organized into three different categories which include your company’s operating activities, investing activities, and financing activities. Within each section, every line item will either highlight the category or the specific activity within that category and show you how much money was generated or lost.
The first section in every cash flow statement is the operating activities category which shows how your company’s everyday operating activities impact the amount of cash going in and out.
In the operating activities section of your statement of cash flows, you’ll see Net Income listed first. Net income can be retrieved from your company’s income statement for a specific period of time. The example above shows a net income of $26,700.
You’ll then see the Adjustments to reconcile net income to net cash provided by operations section lists any non-cash expenses or revenue that aren’t already accounted for in your bank account.
After adding up this section, the sum of net income and adjustments to reconcile net income to net cash provided by operations equates to the net cash provided by operating activities. For this example, the net cash provided by operating activities is $37,000.
The investing activities section in your cash flow statement displays all the costs of the investments your business made during a specific time period that resulted in cash flowing in or out of your company. Reviewing these expenses can help you determine the overall impact of your investments during this time.
Examples of investing activities that would be represented on the statement of cash flows include:
- The buying or selling of physical assets such as office equipment or office spaces
- An acquirement or merger of another company
- The buying or selling of securities in other companies
Once all your company’s investing activities are added to the statement of cash flows, these investments represent your net cash provided by investing activities.
From the example above, we see that the company spent $4,750 on investing activities.
The final section of the statement of cash flows is the financing activities section which deals with the cash inflow and outflow associated with borrowing money, managing debt, or building capital.
The financing activities section records transactions or investments that other people make in your business. These include:
- Gaining more debt or repaying debt
- Paying for or receiving loans from a bank
- Paying out dividends to your shareholders
After adding all your financing activities, the total amount will be displayed as your net cash provided by financing activities.
The financing activities section of your statement of cash flows allows your business and its investors to evaluate your financial health. By reviewing your financing activities, your company can determine if its current financial model is working or needs to be restructured.
The example above shows that the company raised $7,500 in cash by selling its preferred stock.
Once you’ve finished calculating your cash flows for the three previously mentioned categories, you’ll be able to calculate the cash your company had on hand at the end of the financial period of time:
The net cash increase for period category is the sum of all of the categories in the statement of cash flows. The cash at the beginning of period category will be obtained from your company’s previous cash flow statement.
Finally, the cash at the end of period total is the sum of the net cash increase for period and the cash at the beginning of period.
Interpreting the statement of cash flows to improve your company’s cash flow
Consistently tracking and reviewing your company’s incoming and outgoing cash flow will help your business focus on finding growth opportunities and gain better insights to develop valuable strategies to improve your overall financial status in the future.