What is a Cash Flow Statement?

A cash flow statement is a financial document that provides a summary of a company’s cash inflows and outflows over a specific period, typically a quarter or a year. It offers insights into how a company manages its cash, including where it receives cash from and where it spends it.

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Why Cash Flow Statement Done?

The primary purposes of a cash flow statement are:

1- Monitoring Liquidity: It helps assess a company’s ability to meet its short-term financial obligations and maintain sufficient cash reserves.

2- Financial Analysis: Investors and analysts use it to evaluate a company’s cash management and financial stability.

3- Decision-Making: Business owners and managers rely on cash flow statements to make informed decisions about budgeting, investment, and financing.

How Does a Cash Flow Statement Work?

It typically works through the following steps:

Operating Activities: This section includes cash flows from the company’s core operations, such as sales, collections from customers, and payments to suppliers and employees.

Investing Activities: It covers cash flows related to the purchase or sale of long-term assets, such as property, equipment, or investments.

Financing Activities: This section includes cash flows from borrowing, repaying debt, issuing or repurchasing stock, and paying dividends.

Net Cash Flow: The final figure on the cash flow statement is the net cash flow, which represents the overall change in cash during the period. It’s calculated by adding or subtracting the cash flows from operating, investing, and financing activities.

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What Impact Does a Cash Flow Statement Have?

It provides critical insights into a company’s cash management, which can have several impacts:

Impact on CompaniesImpact on Investors
Helps companies manage cash flow effectively.Assists investors in evaluating a company’s financial stability.
Informs financing decisions, such as loans or equity issuance.Influences investment decisions, considering a company’s cash position.
Can impact a company’s ability to pursue growth opportunities.Helps investors assess a company’s ability to meet obligations.

Let us see cash flow statement formula with example:

This is a Cash Flow Statement (FY23) of a company name Prataap Snacks Ltd.

Cash Flow from Operating ActivitiesINR 80 Cr
Cash Flow From Investing ActivityINR -25 Cr
Cash flow from fianancing activityINR -52 Cr
Net Cash FlowINR 3 Cr

Also Read: Risk Management Definition and Examples