A cash flow statement is likely the most important out of the three financial statements. WIthout a cash flow statement, you won’t be able to make sense of a business’s success. Revenue isn’t anything without cash flow. Many businesses sell their products without collecting any revenue and simply book that sale under receivables.
A company’s cash flow statement actually tells you how much a business is making, whether they’re actually receiving the cash, and how they spend it.
Does the business invest in marketable securities? Do they use it to buy more inventory? A cash flow statement will tell you all these details.
The cash flow statement is divided into three parts – operating activities, investing activities and financing activities.
Under operating activities, you will see all income received into a “Cash and bank” account. This is all sales which goes into your business bank account. If you sell a product or service to a customer who promises to pay in installments, that revenue will not be booked under operating activities.
Instead, you will book that revenue under a “Money in transit” account and only see that revenue in your cash flow statement once the instalments have been paid.
Your operating activities also show all your expenses. And like with income, it only shows expenses that you actually paid out. If you purchased $1,000 worth of inventory from your supplier on credit, that expense will not be shown in the cash flow statement.
The investing activities section shows all cash flows from your investing activities. This includes investing in the stock market and venture capital investments. This section does not show any unrealized gains or losses.
Instead, you will only see realized gains or losses, your capital being invested into an asset and the liquidation of an asset.
This is the section that is most difficult to explain. Financing is anything from a bank loan to stock buybacks and dividend payouts. If the business receives $100,000 from the business owner, this will show up in the financing activities section as a cash inflow.
If the business pays out $10,000 in dividends to all stockholders, this will show up as a cash outflow.