Cash flow – the term which is very important for you if you operate a business. Understanding the whole concept of cash flow helps you effectively run your business. It helps you determine how your company is performing and will perform in the future ultimately it’s cash everything which is depend upon. How much company invested, earned, sold assets, bought assets, lend and raise money from its shareholders, and much more. And all answers to these questions you can only get after reviewing the cash flow statement.
The burning question comes up here – that is how to read cash flow statement? Is there any specific method for that? If you have these questions in mind and want to really read cash flow statement of your company, you’re on the right track.
In this article, I’ll walk you through super easiest ways to read cash flow of your company but make sure to read the article till the end.
Let’s make a start.
Cash flow statement is categorized into three activities
To understand and read the statement of cash flow, you have to read its activities which are divided into 3 categories which include:
- 1. Operating activities
- 2. Investing activities, and
- 3. Financing activities
These three methods will help you understand your company’s cash flow. Let’s talk about them one by one below:
1. Operating Activities
The very first section of cash flow statement includes operating activities. These activities refer to core activities of the company. It generally consists of selling goods/or providing services that generate revenues and expenses for the company. In fact, the operating activities of the business depend upon the nature. For example, the sale and purchase of land are considered as an operating activity. Moreover, operating section of cash flow is displayed into two sections:
- * The direct method, and
- * Indirect method
Most accounting firm generally use indirect method to report the cash flow statement. Indirect method, on the other hand, starts with the net income derived from the income statement. Moreover, it removes the non-operating activities that were included in the income statement. Whereas the direct method shows the cash collected by the business from operations and subtracts the cash paid for operating activities.
2. Investing Activities
What are investing activities? Investment that you make on equipment, buildings, land, etc. to grow and maintain your business. Moreover, the company can sell these assets if it’s got outdated and when is the time to purchase the new one. This section of cash flow includes both the cash received by selling assets and cash spent in buying assets. The cash inflow is marked by positive numbers and outflow is marked by negative numbers in the investing section of cash flow statement. However, the activity of the company will depend upon the nature and type of the company.
3. Financing activities
Last but not least method of cash flow statement is financing activities. So, the activity which is involved in providing funds to a company is recognized as a financing activity. Here activities include issuing shares, paying dividends, borrowing money, paying interest on money, borrowed, etc. Here also cash inflow is marked as positive number and cash outflow marked as negative numbers.
Thorough insight you gain after analyzing cash flow statement
Once you read the cash flow statement thoroughly, you will end up gaining insight about your company and business is performing. Here are top insights you get from CFS;
- – You’ll get to know the performance of the company
- – Helps you in surviving lean periods or economic downturns
- – You get to know the positive and negative cash flow from financial activities
- – How much money your company has (the liquidity of the company) is revealed through cash flow statement
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Cash flow statement is an amazing way to determine how the company generated its cash resources. You have learned that there are three methods through which you get to know about cash flow of your business. Moreover, the total change in all the three categories will reflect the overall increase and decrease of cash flow. Whether you’re a startup or an already existing business, understanding the concept of cash flow is significant. It is because the ability to generate the cash flow helps in determining the cash flow of the business. This way you get to know the financial statement of your company.
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