The cash flow statement provides information on how cash is earned in a company and how it is spent or consumed. It is considered a fundamental financial statement for any business analysis.
Within the different tools with which a company can assess the health of its finances, the Cash Flow Statement is fundamental. Let’s learn more about this financial statement and how it affects the company.
Why is the cash flow statement important?
The cash flow is a basic figure in that it will determine the cash-generating capacity of the company. Therefore, it also determines whether the company can meet its expenses and economic obligations: investment or expansion.
But that is not all: additionally, it is possible to study or analyze each of the different items that influence cash generation through cash flow. These data are basic when you design a company policy or simply when you want to generate strategies to optimize your business resources.
It is considered basic in the operation of any business to have good control over the capacity to generate cash. But, more than that, it is also considered very important to interpret the different keys involved in developing cash flow.
What is the structure of cash flow statements?
There are three examples of actions that make up the Cash Flow Statement:
These are also referred to as operating activities. These are all actions that relate to the objectives of the company. If a company is engaged in marketing a product, it will be all the actions of marketing that product.
In this phase, the elements taken into account are all those that influence the cash generation process, from the sale and purchase of goods to the payment of payroll, utilities, taxes, etc.
Inventories, accounts payable and receivable, liabilities, etc., are computed at this stage.
In this case, all investments in fixed assets made by the company are analyzed. Investments in other companies, securities, securities, etc. are also included.
In short, all types of purchases made by the company that is different from inventories and expenses are included.
This group includes those accounts that correspond to equipment, plant, intangible assets of investments, properties, etc. In other words, it contains items that may influence the maintenance or increase of productive capacity but are not related to inventory or common expenses.
That would be the third action directly related to the cash flow statement. It includes all financing actions that involve acquiring resources for the company.
This type of action can come either from shareholders, converting them into equity shares, or from third parties.
It is important when analyzing financing activities to exclude those liabilities that correspond to transactions. Within these liabilities, e.g., suppliers, labor liabilities, taxes, etc., should be banned: i.e., financial obligations or other actions such as the placement of bonds.
What is needed to analyze these states properly?
Although this is an action that is commonly incorporated in companies in a quasi-automated way, it is not a simple task. It requires some important elements.
The first element is the need to have at least the balance sheets for the last two years and the latest income statement.
Balance sheets are used to analyze changes in accounts. On the other hand, financial statements are also necessary because they can reflect transactions involving cash inflows and outflows: including those items that will not affect cash.
In calculating the cash flow statement, we are trying to find a kind of still picture of the company’s financial situation. When figuring out a cash flow statement for one year, we must have the balance sheet for that year and at least the balance sheet for the previous year.
This is usually done on two balance sheets. There are different methods, although they are commonly grouped into the direct way, which is simpler and quicker but less detailed, and the indirect process is somewhat more complex but requires a greater volume of data.