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Updated February 8, 2021

What Is a Cash Flow Statement?

The simplest definition of a cash flow statement is that it’s a financial statement that measures the cash generated (or used) by a company within a given period.

What Is Included on a Cash Flow Statement?

These statements typically break down a company's cash sources and uses into three categories: 

  • cash flow from operating activities
  • cash flow from investing activities, and 
  • cash flow from financing activities. 

Is Cash Flow the Same As Net Income? 

While cash flow is the cash expected to be generated by an investment, asset, or business, net income indicates how well a company manages its profits after subtracting the following from a company's total revenue: 

Why Are Cash Flow Statements Important?

No matter how it’s measured, cash flow helps companies expand, develop new products, buy back stock, pay dividends, or reduce their debt. This is why some people value cash flow statements more than just about any other financial statement or measure out there. 

Cash flow relies heavily on the state of a company’s cash from operations, which in turn is heavily influenced by a company’s net income. Thus, higher revenues, lower overhead, and more efficiency are big drivers of cash flow.

What Does Cash Flow from Operating Activities Mean? 

Cash flow from operating activities are generally calculated according to the following formula:
Cash Flows from Operations = Net income + Noncash Expenses + Changes in Working Capital

Because working capital is a component of cash flow from operations, investors should be aware that companies can influence cash flow by lengthening the time they take to pay the bills (thus preserving their cash). This shortens the time it requires to collect what’s owed and puts off buying inventory, which preserves cash.

What Does Cash Flow from Investing Activities Mean? 

Cash flow from investing activities primarily reflects the company's purchases and/or sales of capital assets. In simpler terms: assets with a useful life of more than one year that appear on the balance sheet. Companies do have some leeway about which items are/aren’t considered capital expenditures, so the investor should be aware of this when comparing the cash flow of different companies.

What Does Cash Flow from Financial Activities Mean?

Cash flow from financing activities typically reflect the company's purchase and/or sale of stock, and any proceeds from – or payments on – debt financing. This measure will vary with different capital structures, dividend policies, and debt terms that companies may have.

Can Cash Flow Be Negative? 

Absolutely. Negative cash flow occurs when a business has more money going out than coming in. Without a positive cash flow, a company may have to borrow money – and may not stay in business. 

However, having negative cash flow for a period of time isn’t always a bad thing. For example, if a company is spending cash to build a second manufacturing plant, this could generate more cash in the future. On the other hand, if the company has a negative cash flow because it made poor acquisitions or investments, there might not be the same long-term benefit. 
 

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