Financial statements paint a detailed picture of a company's financial health, but many business owners pay attention to the net income statement and balance sheet and ignore the cash flow statement. A profitable company that uses accrual accounting could even have a negative cash flow. To clearly understand if a company can cover expenses and liabilities, its owner must regularly assess the cash flow statement.

The Cash Flow Statement

A cash flow statement records a company's cash inflows and outflows -- the amount of cash and cash equivalents entering and leaving a company during a specified period. The cash flow statement enables the owner, managers, bankers and suppliers to view the company’s operations from a cash perspective so they better understand how smoothly the operations are running, where growth funding is coming from and how wisely the money is spent. The cash flow statement shows sources of cash, including operations, financing and investing.

Operational Cash Flow


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Operational cash flow measures cash inflows and outflows from core business activities. This section clearly shows whether a company’s revenue structure can cover all expenditures. If the revenues cannot, the net operating cash flow will be negative. If a company has a problem collecting on its receivables or is amassing unsold inventory, that will be reflected in operational cash flow. Cash flow may also vary depending on the monitoring period. Monitoring the cash and projecting operating cash flow out of the business can identify potential shortfalls in advance.

Financing Cash Flow

When a company has insufficient operating cash, it must generate cash through financing or investing activities. Financing cash flow measures cash generated by financing activities, including new debt and equity plus repayments and dividends. Changes in the liabilities and shareholder’s equity section of the balance sheet are reflected here. For example, a tech company that received a venture capital investment round will show the proceeds in the financing cash flow section. New financing done solely to replace old financing could be a warning sign.

Investing Cash Flow

Investing cash flow measures cash generated from investing activities, including purchases or sales of equipment, property or a subsidiary. Changes in items reflected in the asset section of the balance sheet are recorded here. Growing companies typically show a negative investment cash flow due to all the capital expenditures. Struggling, asset-rich companies often show continual asset sales that offset negative or low operational cash flow.

Periodic Review of the Cash Flow Statement

Generally, the higher the operational cash flow, the stronger the company. By periodically reviewing the cash flow statement, rapidly growing companies can identify the need for cash and use financing to cover the shortfalls. A troubled company could head off financial distress by noticing negative operating cash, minimal investing cash and significant financing cash flow. The owner who sees this could restructure operations and revamp the financing structure.