Cash Flow Statement

What is a cash flow statement?

A cash flow statement is one of the three central financial statements, along with the income statement and balance sheet.

The purpose of the cash flow statement is to provide a detailed picture of the company’s actual cash inflows and outflows over a specific period of time. Because it provides an important view of a company’s financial health, the cash flow statement can act as a critical diagnostic tool for finance professionals, investors, and lenders.

Key sections of a cash flow statement.

The cash flow statement is typically divided into three primary sections:

1. Operating activities.

This section reveals the cash generated or used in a company’s core business operations related to generating revenue and incurring expenses.

Central items for operating activities include:

• Net income (adjusted): Starts with Net Income from the income statement and adds back non-cash items like depreciation and amortization.
• Changes in working capital: Includes adjustments for increases or decreases in accounts receivable, inventory, accounts payable, and other short-term assets and liabilities.
• Other non-cash items: This can include gains/losses on the sale of assets or stock-based compensation expenses.

2. Investing activities.

This section reflects cash inflows and outflows related to long-term investments. Key items include:

• Purchases/sales of property, plant, and equipment (PP&E): Cash used to buy or proceeds from selling buildings, machinery, etc.
• Acquisitions/investments: Cash spent on acquiring other businesses or purchasing stocks, bonds, or other long-term investments.
• Proceeds from asset disposals: Cash received from selling assets or investments.

3. Financing activities.

This section tracks cash flows related to a company’s debt and equity capital structure. Key items include:

• Proceeds from issuing debt or equity: Cash raised through loans or selling new stock.
• Debt repayments: Principal payments on loans.
• Stock buybacks/dividends: Cash used to repurchase shares or pay dividends to investors.

Methods of presentation for cash flow statements.

• Direct method: This method involves actual cash receipts and payments from operating activities. While considered more transparent, it can be more difficult to prepare.
• Indirect method: Begins with net income and adjusts for non-cash items, as well as changes in working capital. This is the more common method, as it’s often easier to derive from income statement and balance sheet data.

How to analyze a cash flow statement.

Finance professionals analyze a cash flow statement to:

• Assess solvency: Does the company generate enough cash from operations to cover debt payments, dividends, and other obligations?
• Evaluate profitability vs. cash flow: Are strong profits translating into healthy cash flow, or are there discrepancies? Large differences between net income and operating cash flow can signal potential issues.
• Free cash flow (FCF): This metric (operating cash flow minus capital expenditures) shows the cash available for discretionary use after maintaining assets.
• Investing patterns: Is the company investing in growth, such as expanding facilities or making acquisitions?
• Financing activities: Is the company relying on debt or equity financing? Are large dividend payments or share buybacks impacting available cash?

Limitations of the cash flow statement.

Although the cash flow statement is an invaluable tool, it’s important to remember:

• One piece of the puzzle: The cash flow statement should be analyzed with the income statement and balance sheet for a complete financial picture.
• Timing differences: The cash flow statement doesn’t necessarily reflect when bills are due or invoices will be collected, only when cash changes hands.
• Doesn’t reflect a company’s asset values: A company’s assets and overall financial strength are better assessed on the balance sheet.

For these reasons, the cash flow statement should always be scrutinized with the income statement and balance sheet.

How Airbase helps with cash flow statements.

Airbase’s accounting automation helps with cash flow statements in several ways.

• Real-time data: Spend information is available as it happens, not just at the month-end close.
• Accuracy: Automated processes minimize manual data input, reducing errors.
• Granularity: Detailed coding and reporting options allow for a nuanced view of cash movement, pinpointing specific areas driving cash flows.
• Time Savings: Automation of data collection and integration free up finance teams for higher-level analysis instead of time-consuming data preparation.