Essential Financial Skills for People Managers – The Cash Flow Statement

In this post (#3 in my series of 3) we will review The Cash Flow Statement. Depending upon your role in the organization, you may be more familiar with The Balance Sheet or The Income Statement (also known as the P&L).  

The Cash Flow Statement (also known as the Statement of Cash Flows) reports the cash generated and used during the time interval specified in its heading.  It is very similar to the bank statement you receive every month.  It tells you how much cash was on hand at the beginning of the period, and how much was on hand at the end.  It then describes how the company acquired and spent cash in that reported period.  The cash flow statement doesn’t measure the same things that are measured on the income statement.  If there is no cash transaction, then it cannot be reported on the cash flow statement.  Generally, the cash flow statement categorizes activities into 4 areas.

Section 1 – Operating Activities

It starts with a report of the company’s net income (carried over from the P&L).  We then report out on changes in cash where the activities involved earning revenue.  Here we look at changes in current assets and current liabilities (you will recall those terms from our post on the balance sheet).  This section would contain items such as Accounts Payable, Accounts Receivable, Depreciation Expense, and Finished-Good Inventory.  

Section 2 – Investing Activities

This section reports the purchase and sale of long-term investments and property, plant and equipment.  So, if you sold off some property you would record the gain or loss here.  

Section 3 – Financing Activities

This section reports changes in your long-term liabilities and your stockholders’ equity accounts.  Financing activities involve the issuance and/or the repurchase of a company’s own bonds or stock as well as short-term and long-term borrowings and repayments.  

Section 4 – Supplemental Information

This section of the cash flow statement discloses the amount of interest and income taxes paid. It also reports significant exchanges not involving cash. For example, the exchange of company stock for company bonds would be reported in this section.  

Uses for the Cash Flow Statement

I’ll be honest, unless you are an investor or a business owner, I doubt you will ever have much use for the cash flow statement.  I would say that generally understanding your company’s cash flow projections are a good idea when it comes to budgeting.  If cash is projected to be down, you will want to be more conservative in your budgeting.  That may come into play if you have seasonality in your business.  Another use of the cash flow statement is to check how solvent your company is.  Solvency is simply the ability to pay bills as they come due.    

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