Feb 15, 2023
4 min read

How to use cash flow statements for company analysis

Quick summary

Cash flow statements are vital to a company's overall financial statement. The statements provide in-depth information about a business's health by looking at the cash coming in and going out. The cash flow statement is often referred to as the "engine" of a company's financial information overall, as it tells you whether or not your company is generating enough cash to fund day-to-day operations.

Table of Contents

    Cash flow statements are also helpful for investors to see how much money their companies are making (or losing). Comparing current year numbers with the previous year via cash flow analysis makes it easy to check if your company has improved or worsened in terms of its financial health.

    The importance of cash flow statements for corporate finances

    The cash flow statement is an essential financial document for any business. It provides critical insights into the liquidity and financial flexibility of an organization. By highlighting how cash moves in and out of a business, it helps stakeholders understand the company's operational efficiency and its ability to generate cash to fund operations, pay debts, and invest in future growth.

    What do cash flow statements show?

    Cash flow statements show the exact amount of a company’s cash inflows and outflows over a specific period. They track the cash generated from operational activities, investing activities, and financing activities. This breakdown helps in understanding which areas are contributing to the company's cash position, offering a clear view of its financial health and sustainability.

    What information does a cash flow statement include?

    A typical cash flow statement includes three main sections:

    1. Cash from operating activities: This section shows cash generated or used in the business's core operations.
    2. Cash from investing activities: It includes cash used for / or generated from investments like property, plant, equipment, or securities.
    3. Cash from financing activities: This section details cash flow related to funding the business, including debt, equity, and dividend payments.

    Each section collectively provides a comprehensive view of a company’s cash flow status.

    Transforming spend: How fintechs outshine traditional banks to balance innovation, speed, & regulation

    Operating activities include all the regular day-to-day business transactions you perform. For example, if you sell products or services, this would be called revenue (or sales). And if you purchase products or services for your business, this would be called expenses.

    The most common categories of operating activities include:

    1. Revenue from customers - These are sales of products or services to consumers, businesses, or other organizations
    2. Cost of revenue - This is the cost of the goods sold or services rendered. It includes the costs that go into producing your products, such as raw materials and labor, along with any other direct costs associated with creating your product or service
    3. Gross profit - The difference between revenue and cost of revenue is gross profit, which represents your margin (or profit) on each sale. You can break down gross profit into two categories: direct costs and indirect costs.

    Investing activities include:

    • Purchasing fixed assets like equipment or buildings
    • Paying off loans
    • Selling off assets like equipment or buildings
    • Making any other investments in your company that aren't part of your everyday operations

    In other words, the investing activities section shows how much money you spent on longer-term assets such as property, plant & equipment (PP&E), or other companies.

    For example, if a company buys new computers for its employees, that would be recorded as an investment expense. On the other hand, if a company sells some PP&E it previously owned (or pays off some debt), that would also show up as an investing cash inflow.

    Financing activities show how a company raises capital and pays it back to investors through capital markets. Some of the most common financing activities also include:

    1. Issuing stock or bonds: Used to raise capital for the business. When a business issues stock or bonds, it sells ownership shares in itself or debt obligations.
    2. Paying dividends on preferred stock: Some companies issue preferred stock that pays dividends at regular intervals (usually quarterly). Similar to paying interest on bonds, except that preferred stockholders typically have more substantial rights than bondholders do.
    3. Paying interest on debt: Debt financing allows companies to borrow money from banks or bondholders and pay them back over time with interest added to each payment amount.

    How cash flow statements can help your business

    A cash flow statement is helpful for many reasons, including forecasting future earnings potential and identifying areas to improve profitability through cost-cutting measures. A company's ability to generate positive cash flows from operations is often essential when lenders evaluate loan applications or lines of credit from banks.

    In addition, investors who want to gauge whether a company's earnings reflect operational efficiency may look at its operating cash flows and net income figures on its income statement to see how consistent they are over time. A cash flow statement can help determine whether a business is financially solvent.

    Capture the right spend data for your cash flow statement

    One of the biggest challenges for finance and accounting teams is capturing all transactions that impact the cash flow in and out of business. This process requires a robust company card and expense management solution (to capture expenses in real-time) and great integrations with accounting software to show exactly what is available.

    Payhawk's spend management solution, including company cards and expense management software, helps CFOs and financial leaders get insight into the cost of doing business by showing spend in real-time and correctly assigning it to an appropriate category.

    Some of the key benefits of Payhawk's spend visibility include:

    1. More accurate data – Expense management solutions don't always respect the timing difference between expense and payment, which means they don’t always reflect your company’s actual cash position. This strategy can make it difficult to accurately track and report on your company’s true cash position. Payhawk’s integration strategy, however, is built following the accruals principle and respects both dates.
    2. Better management – If you don't have good visibility into your spending habits, it can be challenging to make informed decisions about where to allocate resources for maximum impact – especially if you don't know what types of expenses contribute most to costs and profits.
    3. Demonstrate your performance against the plan – By comparing actual vs. planned spend by category, you can show how well you manage working capital and ensure that you control expenses as planned. This process will help improve confidence among investors and lenders, which is critical for any business seeking external funding, such as venture capital or bank loans.

    Demonstrative trackers for success: An overview

    Cash flow statements are essential for your financials. They show us how well a business uses it's cash and how healthy its operations are. A good cash flow analysis will tell you if a company can pay its bills on time and if it has enough cash to sustain operations in the future.

    A company might look profitable, but if it can't generate enough cash from its business activities, then it's in trouble. The balance sheet tells us how much money a company has, but the cash flow statement tells us how much it's actually getting from its operations.

    Learn how to make better business growth decisions with our all-in-one expense management tool. Book a demo today.

    Trish Toovey - Content Director at Payhawk - The financial system of tomorrow
    Trish Toovey
    Senior Content Manager
    LinkedIn

    Trish Toovey works across the UK and US markets to craft content at Payhawk. Covering anything from ad copy to video scripting, Trish leans on a super varied background in copy and content creation for the finance, fashion, and travel industries.

    See all articles by Trish →
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