How to Understand a Cash Flow Statement

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By Allen Young
eHow Contributing Writer

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Cash flow statement

The life blood of any business is its cash flow. To see how healthy a business is you must understand the cash flow statement. This article will guide you in understanding the cash flow statement and to make sense of it.

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Difficulty: Moderate

Instructions

Things You'll Need:

Cash flow statement

Step 1

Examine the operations section of the cash flow statement first. This is the first section of the cash flow statement. It represents the incoming and outgoing cash generated from the core operations of the business. A strong positive cash flow from operations is a good sign of the company's health.
Step 2

Look at the investing section of the cash flow statement next. The investing section is the second section of the cash flow statement. The changes in cash flow form changes in equipment, assets, or investments are revealed here. Cash goes out to buy new equipment. Also cash comes into the company when ans asset is sold or divested.
Step 3

Review the financing section of the cash flow statement. The last section of the cash flow statement is the financing section. The financing section reflect the changes in cash due debt, loans or dividends. The financing section shows how borrowing money affects the company's cash flow.
Step 4

Look for positive cash flow in the cash flow statement. A healthy cash flow is a sign of a strong company.
Step 5

Study the cash flow statement to see where the cash flow is coming from. Ideally it should mostly come form operations. That means its core business is healthy and generating cash for the company.

Tips & Warnings

A positive cash flow is always good for a company but a negative cash flow is not always bad. For example a company may have negative cash flow because it is investing heavily in equipment or other assets to meet demand. That may mean that the future is bright for the company despite negative cash flow.
Be careful if positive cash flow is due to financing activities. It may mean that the company is taking on a lot of debt that may hurt it in the long run despite positive cash flow. The cash flow statement is only one part of the financial statements. Look at all the statements together not just one part.