Cash Flow Analysis

cash flowOverview

The cash flow statement is what a business or person will have after doing a cash flow analysis. It is a financial statement that shows incoming and outgoing money over a period of time. Looking at a cash flow statement allows you to see how your balances have changed over that time. Typically the cash flow statement is broken down into operating cash flow, investing cash flow and financing cash flow. As an indicator of company strength, many investors consider cash flow to give extremely good insight into the quality of a business.

the cash flow statement is a useful accounting tool for both personal and business. For personal use it can open your eyes to see that you will have enough cash on hand to pay for upcoming expenses, or to see if you’re falling farther into debt. Within a business it can be important to know if there is enough cash to cover the payroll or other expenses. Outside of a business, lenders and investors are interested in seeing the cash flow statement because it indicates the strength and stability of a business.

Benefits of Cash flow statement compared to other financial statements

  • A Budget:
    The cash flow statement gleans valuable information about where money is coming and going. In that respect it is similar to a budget, except budgets are planning tools to help allocate money. Cash flow is measuring exactly where the money is coming from and going to. It also includes those one time expenses that you might leave out of a budget.
  • Net Worth:
    For personal use it is popular to look at your net worth value. That’s the sum of all your assets minus your liabilities. It can be a good thing to look at and track to make sure you’re heading in the right direction, but it doesn’t help you determine if you will have the cash on hand to pay for a big expense next month. That’s because net worth includes the value of things like houses, cars, and RRSP accounts that are not easily converted to cash.
    There is another big difference between cash flow and net worth. Say you took out a loan. In a cash flow analysis you would include the total amount of the loan as incoming money. In a net worth analysis you would include the value of the loan as both an asset, and include the liability so the loan wouldn’t change your net worth (ignoring any fees). The cash flow statement shows that you have cash on hand and the net worth statement shows no change.

Cash flow statement example

Statement of Cash Flow – Simple Example
for the period 12/31/2005 to 12/31/2006
Cash flow from operations $4,000
Cash flow from investing $(1,000)
Cash flow from financing $(2,000)
Net increase (decrease) in cash $1,000

How to Read a Cash flow statement

the cash flow statement is typically broken down into 3 general categories:

  • Operating activities include the production, sales and delivery of the company’s product as well as collecting payment from its customers.
  • Investing activities focus on the purchase of the long-term assets a company needs in order to make and sell its products, and the selling of any long-term assets that are no longer needed by the company.
  • Financing activities include the inflow of cash from investors such as banks and shareholders, as well as the outflow of cash to shareholders as dividends.

How to do Cash flow Analysis

First choose the time period you’re interested in (usually annually, quarterly, or monthly) then go over all debits or incoming money and sum them into categories. Then do the same for every expense. Remember that we’re looking just at cash. Moving cash from one bank to another doesn’t count, but using money to buy an investment does (it’s no longer cash)

Use a table to categorize and organize your information and then sum the totals to arrive at your Total Cash Flow.

Beyond Cash Flow

To further analyze the Cash flow number you may want to investigate the cash flow yield. Cash flow yield is the cash flow divided by the market value of a company. It can be used to compare the relative cash flow efficiencies of different companies.

That’s it! Now you should be able to do you’re own cash flow analysis and create a cash flow statement to see how you or your business are doing