Cash Flow Statement Explained

Cash flow statements are one of the essential Financial Statements that help you to understand the financial health and movement of the company.  It can be derived from the Balance sheets and the Income statements. Given an option of choosing only one statement among all these to analyse you may choose Cash Flow statement to know how the company is performing during a course of time. It is provided in the annual report of the listed company

So what exactly is a Cash Flow Statement? And what makes it the so important?

Cash Flow statement is a part of Fundamental Analysis showing the usage of cash and cash equivalents within an organisation for an ascertained period of time mostly a year or a quarter. It is not same as the Net Income of the company.

 It has three components namely

Cash Flow from Operating Activities

Cash Flow from Investing Activities

Cash Flow from Financing Activities

1. Cash Flow from Operating Activities

As the name suggest it involves the principal revenue generating activities. Net Income includes future incomes and expenses and non cash adjustments like depreciation and amortisation.  We need to know how cash has been utilised during a year. So we add back the depreciation to the Net income and add the Net Working Capital i.e. add or subtract the cash received from Debtors or paid to Creditors.  When the debtors pay you, the Bills receivable in Balance sheet reduces and we add in Cash flow and vice versa.

Operating Activity

Net Income

Add: Depreciation

Add: Cash received from Sales	Less: Cash Purchases
Cash from Debtors	Payment to creditors
Cash from Commission and fees	Cash Operating Expense
Royalty and other revenue	Payment of wages
	Income Tax
TOTAL CASH FROM OPERATIONS

If e.g. Balance sheet of Year 1 show Creditor as Rs.10,000 and Year 2 shows it as Rs.8,000 that means, Rs.2000 of cash outflow has happened to pay off the Creditors. So we subtract it from the cash flow. Similarly every cash expense and income is checked in the same way.

2. Cash Flow from Investing Activities

It takes into consideration the cash used to buy new equipment, buildings or short-term assets such as marketable securities.

Add:	Less:
Sale of fixed Asset	Purchase of Fixed Asset
Sale of Investment	Purchase of investments
Interest Received
Dividend Received
TOTAL INVESTING ACTIVITY

3. Cash Flow from Financing Activities

A company receives money when it issues equity or debentures to the public or get a loan. It shells out its money when it has to pay dividend to shareholders and interest to debenture holders and also while redeeming it.  These changes decide the cash flow from financing activity

Add:	Less:
Issue of shares	Dividends paid
Issue of debentures in cash	Interest paid on Loan/ Debenture
Loan Received	Loan Repayment
TOTAL FINANCING ACTIVITY

All the three sub cash flows would be totalled and added to the Opening balance of Cash to reach Cash and Cash equivalent at the end of the year

Cash Flow Statement

Add: Cash from Operating activity

Add: Cash from Investing Activity

Add: Cash from Financing Activity

Add: Opening Balance of Cash & Equivalent

Cash & Equivalent at the end of the year

Negative Cash Flow is not preferred as seen as sign of weak business but we need to check whether the company has followed any growth strategy and hugely made investments which led to the cash outflows.

-D.V.P