Knowing how to read and interpret a cash flow statement can help you extract essential facts about a company’s financial health, whether you’re a working professional, a business owner, an entrepreneur, or an investor.
If you’re a business owner, this data can assist you to decide whether or not to invest in a company. It might assist you to understand business performance and change important projects or plans if you’re a business owner or entrepreneur. If you’re a manager, it can help you better manage budgets and build stronger relationships with upper management. This allows you to take on greater responsibilities within your company.
WHAT IS CASH FLOW?
A cash flow statement aims to show what occurred to a company’s cash during a specific time period. It’s known as the accounting period. The quantity of cash moving in and out shows an organization’s ability to operate in the short and long term.
Typically, the cash flow statement is divided into three sections:
- Operating activities
- Investing activities
- Financing activities
HOW TO INTERPRET A CASH FLOW STATEMENT
When reviewing any financial statement, think about it from a business standpoint. Financial documents are intended to offer information about an organization’s financial health and condition.
Cash flow statements might tell whether a company is in its early stages of growth or is well-established and lucrative. It can also tell whether or not a company is in transition or on the decline.
An investor may use the information to determine if a firm with inconsistent cash flow is hazardous to invest in. Or whether a company with positive cash flow is ripe for growth. Similarly, a department head might examine a cash flow statement to determine how their department contributes to the company’s health. And then utilize that information to change their department’s budget. Internal choices, such as budgeting and hiring (or firing) workers, may be influenced by ash flow.
Cash flow is often shown as either positive (the company takes in more money than it spends) or negative (the company spends more money than it receives).
POSITIVE CASH FLOW
Positive cash flow shows that a company’s cash inflow exceeds its cash outflow during a given time period. This is a good condition because having extra income allows the company to reinvest in itself and its shareholders, pay off debt, and explore new business opportunities. Positive cash flow, on the other hand, does not always imply profit. It’s possible to make a profit without having a positive cash flow. And it’s also feasible to make a profit without having positive cash flow.
NEGATIVE CASH FLOW
Negative cash flow occurs when your cash outflow exceeds your cash intake during a given period. However, it does not always imply a loss of profit. Instead, a mismatch in expenditures and income may be the cause of negative cash flow. It should be remedied as soon as feasible.
Negative cash flow can also be produced by a company’s decision to expand and invest in future growth. So it’s critical to look at changes in cash flow from one period to the next to see how the firm is doing overall.
IMPORTANCE OF CASH FLOW
Cash flow statements are one of the most important financial papers that a company may produce. They provide crucial information on the company’s health. Regardless of your position, learning how to read a cash flow statement will help you make better business decisions.