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Saturday, December 26, 2015

The Importance of the Cash Flow Statement

The Importance of the Cash Flow Statement

Cash is not everything, but it makes everything different. 

Companies fold not because they are unprofitable, but because they are not able to settle their financial obligations that are due for settlement. 

Most people look at the cash position in the balance sheet, compare it to that of a year ago, and then decide whether the company has improved or not. They wouldn't be bothered to look at the Cash Flow Statement (CFS). 

Actually the CFS must be studied in detail to gain an insight of what has happened to the cash of the company. Some people like to read it from the bottom to the top, some prefer to read it from the top to the bottom.  It doesn't matter how you read it as long as you get the facts right.

Cash flow is about cash inflows and cash outflows. It is not about profits. A company may make profits, but its cash may have dwindled. On the contrary, a company's cash may have improved while the company is showing a loss.

Cash can flow in via the operation of the business, investing activities  financing from banks, right issues, bonds, etc

Cash outflows are operating expenses, interest payment, taxes, company shares buyback, capital expenditure, the purchase of property, etc. 

The CFS will show you all these information. You need to study it carefully before deciding whether a change in the free cash flow is good or bad. 

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