Understanding Cash Flow Statements
Chosen theme: Understanding Cash Flow Statements. Explore how money truly moves through a business, why profit can mislead, and how to translate line items into confident decisions. Enjoy the read, ask questions in the comments, and subscribe for future deep dives.
Why Cash Flow Statements Matter
Profit Is Not Cash
A company can show strong profit and still run out of money. Non-cash expenses, credit sales, and slow collections hide reality. Cash flow statements expose timing, liquidity, and the true capacity to meet obligations without guesswork.
Three Pillars at a Glance
Operating activities show day-to-day cash generation, investing activities capture long-term asset moves, and financing activities reflect debt and equity decisions. Together, they explain where cash came from, where it went, and what changed.
A Friday Payroll Scare
A founder once celebrated record sales on Thursday, then panicked Friday when payroll threatened to bounce. Receivables lagged, payables tightened, and profit meant nothing. Building a cash flow habit turned panic into calm, week after week.
Operating Activities, Line by Line
Start with net income. Add back non-cash items like depreciation and stock-based compensation. Adjust for working capital: increases in receivables and inventory use cash, while increases in payables provide cash. This bridge explains divergences clearly.
Operating Activities, Line by Line
List actual cash received from customers and cash paid to suppliers, employees, and for operating costs. For example, you might collect 90% of sales this month and pay suppliers next month. The pattern tells a practical, operations-first story.
Capital Expenditures and Sustainable Growth
Purchasing equipment or building software platforms often consumes cash today for efficiencies later. Watch trends: rising capex with rising operating cash can be healthy; capex funded by dwindling cash may signal strain or a risky growth pace.
Selling Assets: Not Always a Win
Proceeds from selling equipment boost cash, but may be a one-time fix or indicate underutilized assets. Ask why the sale happened and what replaces the capability. Patterns matter more than an isolated positive number in one quarter.
Intangibles, R&D, and Software Capitalization
Some firms capitalize development costs, shifting spend from operating to investing cash flows. This affects comparability. Read footnotes to understand policies, then normalize to judge true cash generation. Curious how to normalize? Request our simple adjustment checklist.
Financing Activities, Signals to Watch
Borrowing brings in cash; repayments consume it. Interest typically appears in operating cash under US standards, with different options internationally. Track maturity schedules and coverage. Healthy operating cash comfortably services debt through cycles, not just in good quarters.
Start with operating cash flow and subtract capital expenditures. This gives a rough free cash flow number. Track it over time, adjust for major non-recurring items, and compare against strategic needs like new hires, product launches, or debt reduction.
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