There are plenty of different terms that get thrown around in the financial, business, and investing worlds but few that are so important to understand as cash flow. If you’re unsure of the specifics of just what cash flow actually is, then you owe it to yourself and your portfolio to learn more about it as soon as you possibly can. There are plenty of different variables that go into it, but grasping the basics behind it is a fairly straightforward concept and one that you certainly can’t afford to ignore. Here’s a quick look at the basic principles behind it.

Essentially, cash flow is nothing more than the movement of money in and out of an organization, account, project, or other financial structure. It’s often called a cash stream or funds flow as well, but all the terms mean the same thing. In nearly all cases it isn’t measured on a daily or hourly basis but rather assessed over a set period of time, although that period of time can be as long or as short as needed to ascertain whatever is being measured. A few basic things will influence cash flow, and understanding them is a good idea as well.

Cash flow is broken down into two simple categories – inflow and outflow. Inflow is affected by numerous different things including financing, investing, and operations. Financing obviously covers things like loans, investing is related to private investors or to the sale of shares on the open market, and operations is the profit a company brings in through its regular activities. Outflow normally consists of business expenses as well as any investments made, including general overhead or other factors. Obviously, inflow being higher than outflow is needed for a company to remain profitable and have any chance at success in the marketplace.

Cash flow statements are utilized to provide a detailed look at the overall cash flow of an organization, and are used by accountants, investors, creditors, shareholders, and others who are tied closely to the financial success or failure of a company. In the case of investors, for example, using cash flow statements is vital for gauging the risk associated with an investment. The same is applicable to creditors before they extend a loan to the organization in question. In short, this is one area of finance and investment that you simply can’t afford to ignore. Take the time to review any statement in detail before you elect to make an investment.

The following video is borrowed from our BusinessTraining.com platform and was originally recorded for our financial modeling training program. In the following video, we provide a detailed look at cash flow statements.

Video Transcript/Summary: The strategies and tips provided within this video module include:

Cash flow statement typically has 3 categories; operating activities, investing activities and financing activities.
The first line item in the cash-flow statement is Net Income, which is the last line item in the Income Statement. In essence, you are trying to determine how much of the net income was a cash expense and how much was a non-cash expense that can be added back. A healthy company will have growing cash flow.
Depreciation and amortisation are non-cash expenses and are therefore added back to net income. Compensation as a result of an acquisition, in the form of stock for instance, is similarly not a cash expense and is added back. The difference between the actual and provision for doubtful accounts or inventory is added back or subtracted depending on the outcome. R&D and net gains/losses on investments needs to be considered and added/subtracted. All of the above are related to the Income Statement and expenses.
The following are in reference to the Balance Sheet (B/S). If Accounts Receivable decreased on the B/S, that means more people paid and we therefore add this difference as additional cash-flow. Inventory, pre-paid expenses, lease receivables, accounts payable, income taxes payable, accrued compensation and deferred revenue are further line items in the Cash flow Statement.
Adding the line items from points 3 and 4 above, provides the company with their Net Cash provided by Operating activities.
Companies also invest their cash proceeds, with some being more aggressive than others. Some of this might be expiring which results in proceeds added back to the cash-flow statement. There are also investments into the business such as on property, plant and equipment or on mergers and acquisitions. When all of these are added, it provides the company with their Net Cash provided by Investing activities.
A company may issue common stock or repurchase common stock, which needs to be accounted for in the cash-flow statement. Any changes in long-term debt or other financing activities also needs to be dealt with. Adding these up provides the company with their Net Cash provided by Financing activities.
Adding all of these changes and then taking account of the beginning cash balance provides the cash and cash equivalents figure.

I hope that this has given you a better understanding of cash flow statements.

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