Cash is so important to a business that there is an entire financial statement dedicated to tracking the cash that goes in and out. It is often ignored because it is not very easy to read, but hopefully after this, it will be a bit easier.

Simply put, the cash flow statement records how cash flows in and out of a business. It ties together the company’s balance sheet statement and profit and loss statement (P&L) to reflect how the business’ activities throughout the year have increased or decreased the company’s cash.

The cash flow statement is divided into three parts:

1. Cash used in operating activities;

2. Cash used in investing activities; and,

3. Cash provided by financing activities.

Operating Activities

The operating activities show how much cash is generated from the company’s operation. This means cash that is left over after production and administrative expenses are deducted, inventory counted and outstanding monies accounted for. Cash from operating activities captures the P&L and the current assets and current liabilities section of the balance sheet.

Companies can also earn from unrealised foreign exchange gains. Let’s say that a local company has a US client. They sent an invoice to the client for US$100. At the time of the invoice, one USD was equal to J$140. If the invoice was settled that day, the company would have received J$14,000. However, on December 31, when they were closing out all accounts, that invoice still hadn’t been settled, and one USD was equal to J$143. If the invoice was settled on this day, the company would have received J$14,300. That $300 is labelled as an unrealised foreign exchange gain. Now imagine that happens for bigger invoices and that is how companies can earn millions in unrealised foreign exchange gains.

The next section of operating activities looks at how this cash is affected by what happens with current assets and current liabilities, ie working capital. A decrease in any current asset item is seen as money coming into the company, while an increase is seen as money going out of the company. A decrease in any current liability item is seen as money going out of the company, while an increase is seen as money coming into the company.

When a company gets a sale, it is recorded as revenue and included on the P&L statement. However, in some cases, the company does not receive the cash right away. Instead this is recorded as money to be received under accounts receivable. Payables fall under current liabilities, which means that an increase in payables is seen as money coming into the business.

The investment activities section shows the investments that the company made over the year. This may include things like property, furniture or equipment. Financing activities includes things such as income from loans, bonds and notes, loan repayments, interest payments on loans, and dividend payments.

Net Cash Balances

A company’s saving or the cash balance from the previous year, can also play an important role in funding current activities. Is it a good or bad thing for a company to be using cash, or on the other hand having too much cash? It all depends. A better question would be how much cash a company needs and how should this company be using its cash? A company should first ensure that it has enough cash to cover its current liabilities and be able to respond to opportunities to grow the business that may come up.

After that is covered, then a company should look at how much cash it needs and how this cash is used by assessing its current stage in the business lifecycle. A company in its growth stage should be reinvesting cash in the business. A mature company should also have enough cash to cover its current liabilities and may pay out some of its cash to shareholders as dividends. Additionally, they should also have a little extra “sumn sumn” to invest should any opportunities pop up. Another thing to note is that a mature company can get away with not having a lot of cash because it is easier for mature companies to get loans from financial institutions at low interest rates given that they have been in operation for years and have a history of consistent performance.

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