The Cash Flow Statement (CFS) is a vital document for all businesses that want to run well. You don’t need a Cash Flow Statment or need to know how to use it if you don’t want to run successfully. But if you do want to be successful keep reading. As one of the main three financial statements (the others being the income statement and the balance sheet), the CFS is a guiding lighthouse through the murky waters of financial reporting. Here I will attempt to guide you to the … world of CFS.

What is a Cash Flow Statement (CFS): The Basics

But first, what even is a Cash Flow Statement? It is a document that summarizes the total movement of cash and cash equivalents during a specific time period, such as a quarter or year. This way, it connects the income statements with the final balance sheet by providing a transparent means of observing how the river of wealth has moved through the company.

A CFS has more than one use to act as a liaison between the other two documents. It is also a useful observation tool for the company, investors, or bankers. A steady cash flow could indicate a company of steady growth and overall stability. However, it could also be dredged for the skeletons of investors and bring them to light, indicating the risk of putting money into a company that only faces an inevitable decline and failure.

Parts of the Cash Flow Statement

What are the parts of a Cash Flow Statement? The future of the company is observed through three categories: Operating Activities, Investing Activities, and Financing Activities.

Operating Activities

Operating activities are those which produce or lost money through the means of any standard good or practice. The most common operating activity that generates money would be sales. You make and sell a product, and bam, it’s an operating activity. A common activity that reduces on-hand cash would be salary and payroll (or any operating expense.)

Operating activities are a company’s true backbone of revenue; there are TWO options for calculating it. First, the direct method is what you might expect: add up all of the operations which caused cash to flow into the company and subtract the activities which cost money. The second way is known as the indirect method because it’s the opposite of the direct method. This method involves taking the net income and adding or subtracting the differences from non-cash transactions. As non-cash activities and gains will show up on the net income but not the CFS, an accountant must filter out all non-cash items to find the total operation activities.

Investment Activities

An investment activity would refer to the cash used in… investments! These include loans, purchase or sale of assets (physical property), and patents! So yes, there is quite a bit more to investment activities than typical investments. Because companies can invest in more than stocks, they can invest in themselves and what it means to be the best they can be. Or something…

Financing Activities

Financing activities summarize the money from the bank, investors, shareholders, stock repurchases, debts, and bonds. In other words, you can cash in for actual cash or pay out to reduce what is still considered on-hand cash through payment of interest on a bond.

Now that we know what our CFS talks about, it’s time to discuss what it means to be a cash-equivalent because, I tell you what, the last time I tried to pay with a cash-equivalent, I was asked to leave the store. A cash-equivalent is any asset that could be converted into cash within 90 days, like government bonds, treasury bills, and commercial paper, which is not printer paper, but a debt instrument used to finance short-term liabilities.

Wrap Up

So where are we? Well, hopefully, we’ve landed on the basics of a Cash Flow Statement. To learn about properly formatting a CFS, examples, and an in-depth deep dive into the more specific benefits to you and your role, then be sure to check out our next blog: Cash Flow Statements 2: Electric Boogaloo – Revenge of the Cash Flow Statement.