Fundamentals of a Cash Flow Statement Analysis

Fundamentals of a Cash Flow Statement Analysis
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What the Statement Does

A cash flow statement displays the company’s financial performance and strength. It facilitates the financial decision making by providing information about working capital, financial condition and profitability of the company. Prepared usually on a monthly, quarterly or annual basis, the cash flow statement is divided into three parts: cash from operations, cash flow from investments, and cash from financial activities. Check out this sample cash flow statement for a better understanding.

1. Determine the Cash That is Coming In

Your firm will receive cash from various sources such as, sales of goods, returns on various investments, payments pending from the

previous months, etc. In case you are new to business, show the cash you have available at the beginning. In the subsequent months, the sales (cash sales as well as credit sales) will also add to your cash inflows.

2. Determine Your Expenditures

If you are running an organization you must have realized there are more sources of outflows than sources of cash coming in. You must have a record of money spent on buying office supplies, advertising, employee salaries, electricity, transportation, factory maintenance, repayment of debts, replacing the capital assets, etc.

3. Calculate the Difference Between Income and Expenditures

Free cash flow

Now compare the cash inflows (Step 1) with the cash outflows (Step 2). You want the cash coming in to be greater than the expenditures. If the free cash flow (difference between cash inflow and cash outflow) is positive, this amount is the cash available for future investment, repayment of debts or paying dividends to the shareholders. However, if it turns out to be negative, you must borrow that amount in order to maintain a healthy working capital. Working capital is the amount of money required for routine business operations.

4. Planning for the Next Month

The closing balance for the first month becomes the opening balance for the second month. Your analysis of the first month’s cash flow statement will help you plan your finances for the coming month. As your company grows, you may have to add more particulars to your cash inflow and outflow statements. Always remember, the borrowings are supposed to be kept at minimum, and cash inflows should be greater than cash outflows.

Tips for Increasing the Flow of Cash

As you have just learned how to perform a cash flow statement analysis, you should also know how to increase the company’s cash flow for effective financial management. Here are a few very important points:

a. Try to reduce the fixed costs. Fixed costs are the expenses that occur every month and do not change such as, rents, staff expenses, etc.

b. Do not overstock products in the inventory. Maintain enough inventory to meet the consumer demands but try to avoid too much stocking because it will leave you with less available cash for other uses.

c. A cash analysis involves finding ways to increase the sales and reduce the expenditures. An increased sale will automatically increase the cash flow.

d. Do not pay your suppliers instantly only because you have cash on hand. Retain that cash as long as possible and try to invest that money where you expect to get returns. Of course, holding money too long and upsetting the suppliers is not the best option if you have no place to invest your cash. Find a balance between the two.


1. I M Pandey, Financial Management (2007), 9th Edition, Vikas Publishing House

2. Author’s Own Experience

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