Decode cash flow statement to boost your company’s growth

By Ava Daruwalla | April 25, 2022

                                                                      

The cash flow statement is your business's third and final financial statement. It shows how money travels in and out of business, bridging the gap between the income statement and the balance sheet.

A cash flow statement's fundamental structure consists of three sections:

1. Finance-related cash flow

This indicates a firm's operations outside of the company to raise funds. It entails the issuance of additional capital, the payment of interest, the redemption of debentures, and the distribution of cash dividends to shareholders, among other things.

Changes in cash in the financing area include cash inflows from actions such as selling firm shares or taking on additional debt to raise capital. Similarly, when a firm pays out dividends or share repurchases, these represent cash outflows.

2. Cash flow generated by investment activities 

 

This represents a change in a company's financial position due to any gains (or losses) from investments in capital assets such as plants, equipment, and machinery, as well as mutual funds and other investments.

Investing generates cash outflows, sometimes known as "cash out." This is the case because cash is used to buy new equipment, buildings, or marketable securities. However, when a business divests or sells an asset, it is a cash inflow transaction.

3. Operating activities generate cash flow

The cash flow statement's most essential component is undoubtedly the cash flows from operations. It ties the income statement and the usage of cash for operations together.

This is an important metric since it shows the company's ability to earn enough cash from its operations to keep it going. Changes in working capital, such as payments to creditors, receipts from debtors, or any changes in stock levels, cause it.

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