From the course: Finance for Non-Financial Managers

Interpreting the statement of cash flows

From the course: Finance for Non-Financial Managers

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Interpreting the statement of cash flows

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- The statement of cash flows is the baby of the financial statements. The balance sheet and the income statement, they've been around for over 500 years. In contrast, the statement of cash flows first started appearing in just 1988, so it's brand new in an accounting sense. As we talk about the statement of cash flows, you're going to wonder why accountants didn't invent it sooner. I myself asked the same question. The idea behind the statement of cash flows is so simple. The statement of cash flows is a report of the amount of cash collected and the amount of cash paid by a company during the period, either the month, the quarter, or the year. That's a pretty easy concept. We're just focusing on cash. How much cash did you collect? How much cash did you pay? The structure of the statement of cash flows is to separate the cash flows into three categories: operating activities, investing activities, and financing activities. Operating activities are the things that you do every single day, your operations. When would you collect cash from operating activities? Well, Walmart collects cash from its operating activities when it collects cash from selling items to you and me. A consulting company collects cash by providing consulting services to you and me and then collecting cash from us. Those are cash inflows from operating activities. Examples of cash outflows from operating activities are cash paid for wages, for utilities, for taxes, for interest. Operating activities are the things that a company does routinely every single day. The next category of cash flows is investing activities. Here, the word investing means investing in the productive capacity of the business, so cash outflows from investing activities or buying new buildings, buying new land, buying new machines. How often do I do investing activities? Occasionally, but not every day. These are not routine things. I don't go out and buy a building for my business every single day. The third category of cash flows is financing activities. Financing activities are just what they sound like. I'm getting the cash to pay for the necessary things in my business. I'm borrowing some money. I'm getting new investment from owners. Those are cash inflows from financing activities. Cash outflows from financing activities, well, I'm repaying those loans. I'm paying dividends to my owners. Those are cash outflows from financing activities. Now, how often do I do financing activities? Occasionally, but not very often. Operating activities, those are the things that I do every single day repetitively, over and over. I'm in a business to conduct operations. That's what I exist for. Investing activities are expanding the productive capacity of my business. Financing activities are getting the cash to do what I need to do. I'm borrowing money and I'm paying it back. I'm getting cash from shareholders and I'm paying dividends to them. Cash from operating activities, investing activities, and financing activities. Now, let's look at some cash flow numbers for four companies about which you may have heard. Coca-Cola, ExxonMobil, Walmart, and Apple. These numbers are for 2022 and are in billions of US dollars. We call all four of these companies cash cows. The reason we call them cash cows is that their operations generate more than enough cash to pay for all their capital expenditures, CapEx, or the amount paid to buy new land, buildings, machines, and so forth, with cash left over. Wouldn't you like to be a personal cash cow where your daily cash flows were enough to pay for all your cars, all your houses, all your land, and everything else you needed to buy in cash? That is a statement of cash flows. It's only been around for 35 years, but it's been an awesome 35 years.

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