Understanding Cash Flow Statement Insights

New to finance? Then this post is for you: A founder once told me, "We're killing it on sales so why's our bank balance empty?" Turns out, their cash was trapped in inventory and overdue receivables. They weren't tracking true cash flow, which led us to build a real-time cash model. Now? No more surprises just control. Most people overcomplicate this, but three simple formulas changed everything: 1- Operating Cash Flow = Net Income + Depreciation + Working Capital Changes This saved my client $200K. We found they were getting paid in 68 days but paying suppliers in 30 days. So we negotiated both to 45 days, making cash flow predictable. 2- Free Cash Flow = Operating Cash Flow - Capital Expenditures Meanwhile, they were spending $30K monthly on equipment with only $25K coming in. By spreading purchases over 6 months instead of 3, they suddenly had breathing room. 3- Working Capital = Current Assets - Current Liabilities Their $150K working capital looked great, but it was all tied up in slow inventory. After implementing just-in-time ordering, we freed up $60K immediately. The result? Launch day went smoothly. No sleepless nights about payroll.  No emergency borrowing. Track these weekly, and your business will thank you. If you like this post, follow Gary Jain 🚀 for more such content. #cashflow  #finance #accounting 

The P&L & The Balance Sheet are the most popular financial statements. But the Cash Flow Statement is where the true power is. Because even if a company is profitable on the P&L. It may face bankruptcy without sufficient cash to: >> cover operating costs >> invest in growth >> service debt --------- 💎 Linkedin restricts posts to 3,000 characters. Join 29,000 subscribers of The Finance Gem 💎 and enjoy my unabbreviated finance insights delivered every Saturday morning directly to your Inbox (link in my Linkedin profile) --------- ⚫⚫⚫Get the knowledge and skills to accelerate your career and grow your business with my 𝐂𝐚𝐬𝐡 𝐅𝐥𝐨𝐰 𝐌𝐚𝐬𝐭𝐞𝐫𝐜𝐥𝐚𝐬𝐬 (link in my Linkedin profile) Here are 7 Essential Cash Flow Insights you get from a company’s Cash Flow Statement: 1️⃣ Solvency: - Whether the company generates sufficient operating cash flows to service debt obligations. - Whether their use of operating cash flow for debt payments demonstrates strong solvency and an acceptable risk profile. 2️⃣ Liquidity: - Whether the company’s operating cash flow reliably covers current liabilities. - Whether the management of operating cash flow maintains the company’s financial stability and minimizes its liquidity risk. 3️⃣ Free Cash Flow: - Whether the company's free cash flow has shown positive growth over time, reflecting a robust and flexible business model. - Whether the company consistently generates positive free cash flow to self-fund growth, pay down debt, and return money to shareholders. 4️⃣ Financing Activities: - Whether the company strategically shifts its financing activities towards debt or equity as conditions require. - Whether the company demonstrates strong performance and confidence in its future prospects by consistently returning capital to shareholders 5️⃣ Investment Health: - Whether the company is proactively investing in its future growth by increasing capital expenditure over time. - Whether the company skillfully aligns its capital expenditure with operational cash flows, ensuring financial health and a sound investment strategy. 6️⃣ Trends and Volatility: - Whether the company's capital expenditure has been progressively increasing over the years, indicating a solid investment in growth. - Whether the company's revenue and earnings display a consistent pattern, underscoring the predictability of its future performance. 7️⃣ Quality of Earnings: - Whether the company primarily relies on genuine business activities, to achieve its reported profits vs relying on non-cash or non-recurring items. - Whether the company optimizes working capital items like accounts receivable, inventory, and accounts payable, maintaining a stable cash flow from operations and high quality of earnings. What would you add? --------- ➕ Follow me for more finance, business, and cash flow insights. 🔔 Ring the bell at the top right of my profile so you don't miss out on new posts. #finance #entrepreneur

As a business, you MUST understand cash flow. One of the best tools for doing this is the Statement of Cash Flows. Let’s break it down by looking at an example. For 2021, Home Depot has what seems like a dichotomy: increasing earnings huge decrease in cash What gives? It starts with first understanding what Profit actually is. And Profit ≠ Cash. When looking at Accrual Financials, profit is a reflection of: • Revenue earned • Expense incurred So, how do we track cash? The best way is the Statement of Cash Flows. The Statement of Cash Flows formula is: Net Increase/Decrease of cash during period + Cash at beginning of period = Cash at end of period The net increase/decrease is broken down into 3 categories: • Operating Activities • Investing Activities • Financing Activities This data is compiled from the Income Statement & Balance Sheet. Looking at HD’s Operating Activities, we see Earnings and Cash from Operating are within ~$140,000 of each other. Not much to see… • Add back depreciation (not a real expense) • Subtract the increased inventory (used cash to buy) • Add back decrease in Accounts Payable So, we still have a mystery as we look at the Investing Activities. The negative number represents cash used to: • buy assets • acquire businesses The ($2,969) reinvested represents 53% of the $5,552 change in cash. So, partially solved! Last, we look at Financing Activities. Here we see A LOT of movement. We see cash was used to: • repurchase common stock • pay out dividends Cash used in financing > TOTAL operating cash. So, the story emerges. Home Depot used profits and debt payments to: • stock up on Inventory • buy Assets • repurchase Common Stock • pay out Dividends These are not good or bad in and of themselves. The context is what makes them good or bad. • Did they use more cash than they meant to? • Did they overbuy inventory or are they “gearing up” for future sales? • Did they have dividend commitments they couldn’t back out of? • Did they repurchase stock to benefit shareholders or to drive executive bonuses and hurt their long-term health? Repurchasing stock/dividends is equivalent to a private company distributing money. The question is: what’s the best use of the cash generated? Home Depot decided repurchasing stock and dividends were the answer. You get to decide if they were right or not. These insights are hard, if not impossible to see elsewhere on the financial statements. This is the magic of the SCF. No other statement can give you this level of detail behind cash movement. Hopefully, you've seen the value of the SCF. Thanks for reading! If you’re a business owner and want to be able to use your financials as a decision-making tool, check out my cohort (it starts March 11th): https://lnkd.in/gXMntDyz