Statement of Cash Flow Analysis


Concerns about corporate liquidity levels and short-term solvency are factors on which senior executives generally keep a close eye when formulating economic strategies. A company's statement of cash flow provides a trove of operating data about the firm's liquidity movements. This accounting report also enables top management to spot internal inefficiencies that have gone unnoticed, especially if sales revenues do not generate sufficient cash to fund operating activities.


A statement of cash flow is also called a funds flow statement or cash flow report. Investors sift through this accounting summary to take a peek at how senior management administers corporate cash. Inappropriate cash management is a deal-breaker in modern economies because it casts an unflattering light on top leadership's operating dexterity. In fact, financial-market participants may rail against a company that doesn't manage its cash adeptly -- by bidding its stock price down. A funds flow statement indicates, in this order, three types of activities: cash flows from operating activities, cash flows from investing activities and cash flows from financing activities.

Operating Activities

Operating activities are at the heart of corporate administration. In other words, day-to-day operations are the mechanisms that determine a firm's economic pulse, with a special emphasis on how the firm pays vendors and receives payments from customers. The "cash flows from operating activities" section of the statement of cash flows indicates how department heads put policies into place to prevent cost overruns and increase revenues. Specifically, liquidity movements from operating activities include accounts-receivable payments, vendor-payables disbursements, salaries payments, loan repayments and tax remittances.

Investing Activities

To formulate corporate investment strategies, top management often juggles topics ranging from capital spending and real estate acquisition to purchases of equity shares. Cash flows from investing activities show where senior executives' priorities lie -- an important indicator of their strategic vision to steer the firm to economic success. Corporate investments usually draw on long-term asset management, relying on procedures used to purchase real estate, factory plants and production machinery. Other long-term investments include the purchase of financial products, such as stocks or bonds, on securities exchanges (the New York Stock Exchange, for example).

Financing Activities

Financing activities provide the economic fuel necessary to fund short-term activities. Investors pay close attention to corporate funding strategies, as insufficient operating cash might raise the specter of bankruptcy or future financial turbulence. To fund its operations, a company issues equity shares, such as common or preferred stocks, or debt instruments (bonds, for example). The firm also may borrow from private institutions, such as banks, insurance companies and hedge funds.

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