The cash flow statement provides important information about a company's cash flows from operating, investing, and financing activities. It complements the income statement and balance sheet by showing how changes in balance sheet accounts affect cash flow. The cash flow from operations section indicates whether a company is generating enough cash internally and is a key metric to evaluate sustainability and quality of earnings. The cash flow statement also provides insights into how management is allocating cash flows across investing and financing activities. Key metrics like free cash flow derived from the cash flow statement help assess a company's liquidity and ability to operate over the long run.

1. Why Cash Flow Statements Are Important
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2. What does a Statement of Cash Flows do?
• Blends the income statement & balance sheet
• Looks at how cash has come into the business and how it has been spent – providing an indirect
look into the company’s bank account, as the authors of “Financial Intelligence for Entrepreneurs”
have noted.
• Because of the accrual method of accounting (recording of actions as they occur, not when cash is
exchanged), companies may be showing strong financials but eating up cash.

3. 3 MAJOR PARTS:
• OPERATIONS
• FINANCING
• INVESTING

4. • Shows how much money the company is generating from its regular operations – from the basic,
fundamental production and sales of goods and/or services.
• “Cash flows from operating activities is really the most critical,” according to Sageworks Chairman Brian Hamilton.
• Net Income + Non-cash expenses
• Adjust for changes in current assets and current liabilities
• For example, a sale made on credit does not affect cash, but it would increase sales (and therefore net income) and
would create an increase in accounts receivable. The related increase in accounts receivable is deducted from net
income to show the actual cash from operations.
• “That number’s crucial, because if you compare that to profitability, now you know two things,”
Hamilton says. “Are they profitable by GAAP? And are they actually making cash in their
operations?”
OPERATIONS

5. • Knowing how a company is getting and spending its cash allows you to better gauge the quality of
a company’s earnings – that is, whether they are sustainable or aided by temporary factors or
even by management accounting.
• The section on cash flows from financing activities may show that equity was issued to raise cash
or to make acquisitions.
• While raising cash through equity may be a good thing, it’s not money that the business generated on its own, and a
company can’t survive long if it doesn’t generate cash on its own.
• This section will also show whether stock issuances are outpacing or lagging stock repurchases by
the company, an issue of keen interest to shareholders.
FINANCING

6. This section shows:
• whether the company is investing its cash in the future growth of its business through new
facilities or other capital expenditures,
• whether it is selling assets to bring in more cash,
• or whether it’s using its cash in an entirely different way than peers.
INVESTING

7. Key Metrics & Ratios
Metrics and ratios based on information contained in the cash flow statement can help assess the
company’s financial condition as it relates to its liquidity, its ability to operate as a going concern and
its long-term value.
• CASH INTEREST COVERAGE RATIO
• CASH CURRENT DEBT COVERAGE RATIO
FREE CASH FLOW = Net cash from operations – capital expenditures
 Shows how much money the firm generates after money is invested to keep it running and
growing, and it is the major component used to evaluate pricing for initial public offerings (IPOs).

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9. Contact Information
Sageworks Institute
Helping Journalists Find the Narrative Behind the Numbers
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