Though the role of a CFO is changing rapidly, a few financial topics remain consistent. One of those is cash flow – the movement of money in and out of your business. Measurements of cash flow can give you insight into your company’s value and financial health at any period in time. A Statement of Cash Flows indicates how cash has been allocated and whether it has increased or decreased over time. It is also less subjective to accounting decisions than an Income Statement, which is important when comparing a company’s performance versus others in the industry. When looking at a statement of cash flows, it’s important to highlight the most telling numbers first, the beginning and ending balances. These figures give you the big picture of your company’s sales and spending.
There are three main sections of a statement of cash flows to analyze: First are the cash flows from operations, representing cash acquired or used during normal business operations, like selling product or fulfilling accounts payable for inventory or other resources. Second, cash flows from investing show money spent on capital expenditures and fixed assets like real estate and equipment. Acquiring those assets decreases your cash position where disposing or deciding not to invest increases it. This section also includes cash spent or gained from buying and selling stocks. Finally, cash flows from financing accounts for money paid or received from loans from a bank or other company as well as other borrowing activities. Cash increases when these liabilities are taken on, and decreases when they’re paid off. It is important to explain to your stakeholders the components within each of these three sections, trends which are impacting and influencing significantly, and how each one contributes to the ending balance.
The relationship between assets, liabilities, and cash balance is an important one to emphasize for your audience. Though a higher positive balance at the end of the sheet looks good, it can often be the result of loans or unpaid bills that have yet to be resolved. Comparing the balances of the statement’s three sections over time is a better way to explain the company’s situation. In a healthy company, a positive balance in the cash flows from operations section shows strong sales and efficiency. A negative balance in cash flows from investing results from the allocation of cash to buy assets to help the company grow consistently in the future. A short term negative balance is ideally converted to better future sales. The balance in the cash from financing section could be positive or negative, depending on if the company is borrowing cash to invest, or if it is focusing on paying these liabilities off to the bank or shareholders. Stressing these sub-balances over the final total can help you better articulate the main components of your company’s financial situation to stakeholders.
Cash flow is one of the strongest indicators of a company’s financial condition, so being transparent with your stakeholders’ is always a good idea. It is important to illustrate a strong command of cash inflows and outflows to enforce your company’s financial condition and alert to any potential shortfalls which could require additional financing needs before it is too late.