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What Is The 'Cash Flow Statement'?

The Cash Flow Statement is straightforward: it’s an examination of a company’s bank account over a certain period of time. Think of it like a checking account ledger: deposits of cash flow in, and withdrawals of cash flow out. Ideally, more money flows in than flows out, and the total never goes below zero. Every Cash Flow Statement covers a specific period of time: a day, a week, a month, a year. The time period of the report depends on the purpose.

Josh Kaufman Explains The 'Cash Flow Statement'

In order to understand how well a company is performing, it’s useful to look at financial reports that track the business’ performance. Where should you begin?

I recommend starting with the Cash Flow Statement. We’ll examine the other basic types of financial statements in a moment, but examining the Cash Flow Statement is the best place to begin.

The Cash Flow Statement is straightforward: it’s an examination of a company’s bank account over a certain period of time. Think of it like a checking account ledger: deposits of cash flow in, and withdrawals of cash flow out. Ideally, more money flows in than flows out, and the total never goes below zero.

Every Cash Flow Statement covers a specific period of time: a day, a week, a month, a year. The time period of the report depends on the purpose. Shorter periods, like days and weeks, are most useful for making sure the company doesn’t run out of cash. Longer periods, like months and years, are more useful for tracking performance over time.

Cash tends to come from three primary sources: operations (selling offers and buying inputs), investing (collecting dividends and paying for capital expenses), and financing (borrowing money and paying it back). Cash Flow Statements usually track these sources separately to make it easy to see where the cash flows come from.

The nice thing about cash is that it doesn’t lie. Barring outright fraud, cash is either in the bank account or it’s not. If the company spends a lot of money, but less is coming in, the business’ cash position will decrease over time. There’s little room for “creative interpretation.”

Many investors use a metric called free cash flow when evaluating companies. This metric comes from the Cash Flow Statement: it’s the amount of cash a business collects from operations minus cash spent for capital equipment and assets, which are necessary to keep the company operating. The higher a company’s free cash flow, the better: it means the business doesn’t have to keep investing huge amounts of capital in order to continue bringing in money.

In every business, cash represents options: the option to create new offers, invest in marketing and sales, hire employees, purchase equipment, acquire another company, etc. As a general rule, the more cash your business has at its disposal, the more options it has, and the more Resilient the business becomes.

Questions About The 'Cash Flow Statement'

• Do you have a current Cash Flow Statement?
• If not, can you create one?

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"Lack of money is the root of all evil."

Mark Twain

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