Whether you are the manger of a business or a potential investor, interpreting the cash flow statement is important to knowing the health of the company. The cash flow statement can quickly give you an idea of how the company is doing. Here are some tips for interpreting a cash flow statement.
Understand what makes up the cash flow statement. The cash flow statement is comprised of three parts: the operations, investing and financing sections. Each section examines the company's cash flow from a different angle.
Examine the operations section first. This shows the incoming and outgoing cash form the company's core operations. Ideally, this figure should be positive, and most of the company's cash should be from this area. That would indicate that the company's core operation is generating a healthy cash flow and the company is stable.
Review the investing section of the cash flow statement. This section reveals the changes in cash due to equipment, assets or company investments. For example, cash goes out when new equipment is bought and cash comes into the company when an asset is sold.
Examine the financing section of the cash flow statement. This section will show you the changes in cash due to the financing activities of the company, such as loans or dividends.
Look for positive cash flow. Positive cash flow is the lifeblood of any company. A strong cash flow is a sign that the company is healthy.