Cash Flow


CASH FLOW


Think of cash as the lifeblood of every business. Without cash flow, no business can function and without an accurate picture of cash flow, no investor can have a complete picture of a company.

Cash Flow From Operations

A company's statement of cash flows reflects how readily the business can pay its bills, and it provides important information about a company's sources and uses of cash. But measuring cash flow solely from a balance sheet or an income statement is difficult and potentially misleading. That's because not all revenue is received when a company earns it, and not all expenses are paid when incurred.
The difference between an income statement and a statement of cash flows is roughly analogous to the difference between a credit card statement and a checkbook ledger. A credit card statement includes charges that haven't been paid off yet, while an updated checkbook ledger indicates where cash has been spent and whether there's enough to pay off debts like a credit card bill. Similarly, a company's expenses and revenues are recorded on an income statement, regardless of whether cash has changed hands yet. A statement of cash flows, on the other hand, traces where cash came from and where it was used.



Cash flow from operations starts with net income (from the income statement) and adjusts out all of the non-cash items. Income and expenses on the income statement are recorded when a company earns revenue or incurs expenses, not necessarily when cash is received or paid. To figure out how much cash the company received or spent, net income is adjusted for any sales or expenditures made on credit and not yet paid with cash.

Cash Flow From Investing

Cash flow from investing includes cash received from or used for investing activities, such as buying stocks in other companies or purchasing additional property or equipment.

Cash Flow From Financing

Cash flow from financing activities includes cash received from borrowing money or issuing stock and cash spent to repay loans.

Sizing Up Operating Performance

Of the three main sources of cash flow, analysts look to that from operations as the most important measure of performance. If operations alone don't generate positive cash flow, that may be cause for concern. In addition, a decrease in cash flow due to a sharp increase in inventory or receivables can signal that a company is having trouble selling products or collecting money from customers. However, analysts look at the relative amount of these changes if accounts receivable have gone up by the same percentage as sales revenues, the increase may not be unusual.


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