A cash flow statement is a table that reflects the inflow and outflow of cash and cash equivalents of an enterprise during a certain accounting period.
Cash refers to cash on hand and deposits that can be used for payment at any time. Cash equivalents refer to investments held by enterprises with a short term, strong liquidity, easy to convert into known amounts of cash, and little risk of changes in value.
In the statement of cash flows, cash flows are divided into three categories according to the three different types of economic activities carried out by enterprises: cash flows from operating activities, cash flows from investing activities and cash flows from financing activities.
First, let’s look at cash flow from operating activities. Cash flow from operating activities is the cash flow generated in the production activities of an enterprise, which is obtained from cash income minus cash expenditure.
Whether a company is currently making a profit or a loss, the results of a company’s operations will eventually be reflected in the cash flow generated by its operating activities.
Second, look at the cash flow from investment activities. Cash flow from investment activities means how much money a company invests abroad. This part can tell the company’s foreign investment situation or the company’s expansion speed.
Finally, cash flows from financing activities. Financing activities’ cash flow is a means of borrowing money from people, such as issuing stocks and bonds to be bought by investors, thus generating cash flow.
Simply put, a cash flow statement describes the ins and outs of a business’s cash. Every penny that goes in and out of a business account ends up in a cash flow statement, much like a running book of your expenses. Where did the money go? Nothing more than production, operation, investment, and financing.
Here is an example:
Jack opened a restaurant. However, due to Covid in the past two years, the business situation of this restaurant was not very good.
After taking stock, Jack found that his store was losing $100,000 a month. Fortunately, he still had $1.2 million to spend. So right now, Jack’s cash flow from operating activities is $1.2 million.
Jack was very distressed. When he went out to relax, he happened to find that a small supermarket on the corner of the street was still doing well, so he planned to invest $200,000 in the supermarket. Since the $200,000 is an expense, it is recorded as a negative $200,000 in the cash flow statement.
The investment alone was not enough. Jack realized that the $1 million in the account would only sustain the store for another 10 months, so he needed to raise more funds. He then brought in investors and secured $2 million in investments. This $2 million is considered a cash inflow from financing activities and is recorded as +$2 million on the cash flow statement.
The balance sheet, cash flow statement, and income statement are collectively referred to as the three financial statements. They are the symbol of a company’s strength, vitality, and ability.
It is important to note that sometimes the same cash flow means different things to different businesses.
Here is an example:
In 2018, Company A’s cash flow from operating activities reached $100 million, and investment activities and financing activities spent $80 million and $10 million respectively. Therefore, Company A’s net cash flow was $10 million.
In the same year, Company B’s cash flow from operating activities was – $50 million and cash flow from investing activities was $20 million, but it obtained a financing cash flow of $80 million, so Company B’s net cash flow also reached $10 million.
You see, even though they both had a net cash flow of $10 million, that means they both increased their cash by $10 million. However, our impression of each company differs. We feel that the first company is healthy and fully self-sufficient, but the activities of the second company are running out of money.
