When it comes to the business world, there are several terms that you may not have heard before. Sometimes, even if you may have heard of the terms, you probably don’t know what they mean. Or you don’t fully understand how the whole concept operates –that is, unless you’ve been to business school.
One such term is the Cash Flow Statement. And while it may seem quite straightforward, it may have just a few components that you can fully grasp. But for business people, this is one term that you may want to fully understand.
In simple terms, the cash flow statement is the concept of the flow of cash in and from the company. The flow may be from investments, primary sources of the business, financing, and other forms of flow the company has. To get a clear and full picture of what cash flow is about, keep reading.
How Cash Flow Statement Works
If you want to fully understand how the cash flow statement works, you need to understand why it has to exist. If you have a company and the company has investors, cash flow statements are how the investors can tell if the company is headed in the right direction. The lenders would like to see this information before they can give any credit.
This report has been mandatory for any company to have in its financial reports since the year 1987.
Structure of the Cash Flow Statement
Now, for you to further get the grasp of what a cash flow statement is you need to see the structure of the whole idea. There are several structures that make up the cash flow statement. Each one plays a crucial role in the growth and benefit of the company.
- Operating Flow - The first structure that you want to be looking at when it comes to this concept is the operating flow. This is what the company makes from its main source of operations. For example, if the company is about I.T., this is the flow that comes from the I.T. services the company offers. It [the flow] can be from inflow or outflow, but all the cash that is from the primary source is classified here.
- Investing - The next flow that you have to look at is the investing part of the company. Every company always looks at investing at one point or the other. It can be in a number of ideas, even the workforce at times. But most of the time it is through different avenues. Without this idea, the company may be making huge losses in its investment without knowing since the company is making profit through other avenues. At times, the company may choose to invest in things that will reduce losses, and that reduction can only be shown in this report.
- Financing Flow - The other crucial part of the cash flow structure is the financing flow. This is where you get to know how much is coming in from investors and banks, as well. This is also where cash paid to shareholders is stated. It’s not all about shareholders and banks here; you also have the amount that is paid to finance loans. The money that is used for stock repurchase and the payments of dividends and the section is divided into two.
- For when capital is raised, and that’s called cash in.
- When dividends are paid off; that is cash out.
Every shareholder pays close attention to the cash flow statement when it gets to this section.
Also read: What Is Inventory Accounting? A Brief Guide
How To Calculate Cash Flow
Calculating cash flow can be done quite easily by making an adjustment to the income or just subtracting the difference from the revenue. No cash items are usually added to the net-income, and calculating leaves you with the cash-only flow. This is where you find out if the company is liquid or not.
Conclusion
To run a successful business, the understanding of the cash flow statement should be clear. That’s how you know which parts you shouldn't be pumping money into and the parts where you should. You also get to understand if the company is liquid or not. Here was just a guide that you can use to further understand what cash flow is.
