A business strives to generate more cash than it is spending. A cash flow statement shows the key components of income flowing in and detailed expenses flowing out each month. When a statement shows more income than expenses, the business has positive cash flow and is in a position to reduce its debt, acquire more assets or perhaps even another company. Cash is king and positive cash flow makes a company appear strong in the eyes of a stockholder or an investor.
The operating activities component is critical on a cash flow statement. It reflects how successful the company's business model is by showing over a monthly spreadsheet whether or not the business is able to turn a profit within a particular time frame. Losses on a cash flow statement are a likely indication that the company will be experiencing financial challenges and will not be in a position to make investments or purchases for the growth of the company.
Investment activities are considered a key component because they can be a sizable expense on a cash flow statement in acquiring equipment, stocks, property or other long term assets. The investment component may be misleading in that it only reflects the amount paid in cash; it does not reflect any financing. If a company were to purchase equipment for $500,000 but only paid $50,000 of its own cash, only $50,000 will show up on the investment component of the cash flow statement in the month it was paid, with the balance reflected in financing activities. It may appear, therefore, that the cost of the equipment was only $50,000. Supporting notes clarify the figures in the cash flow statement.
From time to time a business may need a loan or financing. Any external loans that have to be paid by the company, sales from common stock or paid dividends are reflected in the financing activities component of the cash flow statement. Financing activities are a key component of a cash flow statement as they affect the net profit or loss bottom line.
Until income starts to flow, a business may find that it is spending more than it is receiving and each month the cash flow statement reflects a loss. The business reaches its break-even point when income stabilizes and the business is able to cover all of its payment obligations. If the statement is accurately planned in its assumptions of income and operating, investing and financing activities, the business should continue to incur a profit after its pivotal break-even point on the cash flow statement.