A cash flow statement reports the amount of cash generated during a given period of time. It’s intended to provide information on a business’s current liquidity and solvency as well as its ability to change cash flows in the future.
- The three main components of a cash flow statement are:
Cash from operations refers to all cash flows regarding business operations. Operating activities can include production, sales, delivery of a business’s product, and payments from customers. It can also include purchasing materials, inventory costs, advertising, and shipping.
- Cash from investing arises from actions where money is being put into something with the expectation of a gain over a long period of time.
- Cash from financing results from borrowing, repaying, or raising money for the business
These three sections highlight a company’s sources of cash and how that cash is being used. Many investors consider the cash flow statement to be the most important indicator of a business’s performance.
There are a variety of ratios you can pull in your cash flow statement. Here are a few to help you start measuring the quality of your cash flow and create a cash flow analysis:
- Operating cash flow to net sales tells you how many dollars in cash are generated for dollars of sales. It’s a percentage of a business’s operating cash flow to its net sales from the income statement.
- Operating Cash Flow to Net Sales (%) = Operating Cash Flow ÷ Net Sales
- Free cash flow measures how efficient a company is at generating cash.
To calculate free cash flow, find the net cash from operating activities and subtract capital expenditures required for current operations.
- Free Cash Flow = Cash from Operating Activities – Capital Expenditures for Current Operation