A cash flow statement is just what it sounds like: an indication of the cash generated or used by a company in a given period.
Cash flow statements set out a company’s cash sources and is used in three categories:
Cash flow is not the same as net income and is generally calculated according to the following formula: Net income + non-cash expenses + changes in working capital = cash flows from operations.
A cash flow statement differs from a balance sheet and income statement because it does not contain information on future incoming funds or outgoing cash that has been recorded on credit. That’s important to know because cash is not the same as net income, which on an income statement and balance sheet includes cash sales together with sales made on credit.
A company’s cash flow statement measures how well it manages its cash “position,” which simply means its success at generating cash to meet debt obligations and fund operating expenses. Combined with a balance sheet and income statement, a cash flow statement has been a mandatory component of a company's financial reports since 1987.
The cash flow statement is valuable to both investors and creditors. Investors use it to understand how a company's operations are running, where its funds are coming from, and how those funds are being spent. In other words, it helps investors determine whether a company is on solid financial ground. For creditors, a cash flow statement helps then determine how much cash, or liquidity, is available for a company to operate and pay its debts.
Cash flow statements help a business expand, develop new products and services, buy back stock, reduce debt, and/or pay dividends. It’s a company's key measure of its strength, profitability, and long-term outlook and can be used to predict future cash flow, which helps to budget. One important note is that negative cash flow is not always seen as a “negative” by investors if it's due to a company's growth strategy in the form of expanding operations.
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