Cash Flow Forecast: Understanding Your Company’s Financial Statement

A financial cash flow statement (CFS), also known as a cash-flow statement, is a financial document that provides an overview of cash flow. This also shows complementary items in a business enterprise’s operation. Additionally, this measures how well a company manages its funds by assessing how much cash it generates to pay its debt and keep its normal business operations.

The CFS is a main document among the three primary financial statements. In this article, we will show you how the CFS is structured and how you can use it for analyzing a business.

How to Use Cash Flow Statement 

The cash flow statement indicates the circulation of a company’s business, shows where revenues come from, and shows how you spent them. This gives financial information about the quantity of cash available to a company to fund its daily expenses and pay down its debts. CFS is as important to investors in helping them determine if a particular company can maintain profitable results in the future. As such, investors can use this statement to make better investment decisions.

Structure of the Cash Flow Statement

  • Cash flow from operations
  • Cash flow from investments
  • Cash flow from financing
  • Disclosure of revenue not included in the corporate financial statements is also referred to as accounting under generally accepted accounting principles (GAAP).
Cash from Operations

The definition of the operating activities of the CFS involves any sources and use of money directly from business revenue. In other words, it shows how much money you’re obtaining via the products or services of a company. In the case of a trading portfolio or an investment business, receipts from the sale of loans, debt, or equity instruments will also be in the inclusions because these are also business activities.

These operating activities could include receipts from the following:

  • sales of any goods or services,
  • interest payments
  • income tax payments
  • payments made to providers of goods and services used in production
  • salary and wage payments to employees
  • rent payments
  • any other type of operating expenses.
Cash from Investments

Specific assets used to acquire cash from the company’s investments include equipment, property, or ventures. Assets, payments to vendors, or similar expenditures made with money from experience will be in this category. Taking ownership of new equipment, other assets, or ventures that use cash from underlying investing is an example of money coming in from investing.

Changes in cash from buying are usually called money out of items because cash is for acquiring resources, such as new buildings or short-term inventory. On the other hand, disposing of resources will turn the transaction into a cash-in investment.

Cash from Financing

Cash from financing activities is cash or securities from multiple sources, including investors and banks, and how you distribute cash to shareholders. It includes dividends, payments for stock repurchases, and repayment of outstanding debt attributable to the company.

Changes in capital from financing are cash-in when you raise money and cash-out when you pay dividends. As a result, a company gets cash financing when it issues a bond to the general populace. However, since the company provides interest to bondholders, it decreases its cash flow. Bear in mind, even though interest is a worthwhile expense, it is recorded as a disbursing activity instead of a financing expense.

How to Calculate Cash Flow

There are two reliable methods of calculating cash flow: the direct method and the indirect method.

Direct Cash Flow Method

The direct method adds all cash flows to the record, including payouts to suppliers, receipts collected from customers, and payroll. The direct approach is commonly used by small businesses using the cash basis accounting method.

You can calculate these figures by examining the positions of various asset and liability accounts by using each group’s opening and closing balance over a period and tallying the net decrease or increase. But, again, it is usually presented clearly.

Indirect Cash Flow Method

The indirect method calculates cash flow by adjusting net income by adding or subtracting differences resulting from non-cash transactions. Non-cash items such as accounts receivable and inventory show positive or negative differences on the company’s balance sheet from one period to the next. Therefore, the accountant will identify any increases to and decreases from asset and liability accounts that need to be added back to or excluded from the net income figure to decide on an accurate cash flow or outflow.

It would help if you reflect changes in accounts receivable (AR) on the balance sheet from one accounting period to the next in cash flows.

If AR goes down, more cash may enter the company in the form of customers paying off their credit accounts. Just add the amount by which AR goes down to net earnings.

An AR increase in net gain ought to be subtracted from income because the amounts reflected by the AR aren’t real cash.

How is a company’s inventory change accounted for on the cash flow statement?

An increase in inventory indicates that a business spends more money on raw materials. As a result, expenditures take effect on inventory value away from earnings.

Add the decrease in the inventory to net incomes. Investment purchases reflecting an increase in accounts payable, are increased by the year-on-year increase and added to net income.

The same logic applies to taxes, salaries, and prepaid medical coverage. First, subtract these payments from the net income. Then, add any discrepancies to net income if money is still due.

Limitations of the Cash Flow Statement

Negative cash flow should not change automatically to trigger alarm bells without further scrutiny. Company expansion may trigger poor cash flow. Thus, your CFS would be helpful in the long term.

Determining the flow of revenues through target reporting periods gives investors an idea of how the company is doing and whether a company has financial problems or is potentially successful. You should also consider the CFS with the previous two financial statements.

Difference Between Direct and Indirect Cash Flow Statements

Direct versus indirect cash flow influences the way cash and expenses are recognized. You can determine actual inflows and outflows as amounts in the direct method. Report the cash flow statement using cash payments and receipts simply and concisely.

The indirect method calculates the necessary cash flows without a direct approach, which calculates inflows and outflows from cash receipts and payments from the income statement and balance sheet.


A cash flow statement is a beneficial indication of a company’s financial wellness, related resources, and potential. It can help you assess your company’s liquidity and cash flow and helps with forecasting.

Investors can judge a company’s financial health using the CFS assessment. This is not, however, an absolute rule. Sometimes, a company’s financial health harms the decline it undergoes due to business growth.

An investor can understand accurately the amount of cash made and the potential financial state of a business by investigating the CFS.

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