Cash flow statements - analysis Having positive cash flow is important because it means the company has at least some liquidity and may be solvent. General rules: Transactions that result in an increase in assets will always result in a decrease of cash flow. Transactions that result in a decrease in assets will always result in an increase of cash flow. Transactions that result in an increase of liabilities will always result in an increase of cash flow. Transactions that result in a decrease of liabilities will always result in a decrease of cash flow. The company may have a positive cash flow from operations, but a negative cash flow from investing and financing. This sheds important insight into how the company is making or losing money. Operating activities Cash flow from operating activities are essential to help analysts assess the company's ability to meet ongoing funding requirements, contribute to long term projects and pay dividends. Cash flow from operating activities provide feedback on the company's ability to generate income from internal sources. Operations = internal Net income adjusted for non-cash charge and the increases/decreases in working capital. Excess cash that allows firms to pay its debts, pay dividends and make investments. Sources: Business growth Profitability growth Working capital growth Investing activities Analysis if cash flows from investing activities focus on ratios when assessing a company's ability to meet future expansion requirements. Investing = external Most parts generate cash outflows from plant, premises and equipment, business acquisitions etc. Inflows come from sales of assets, businesses and investment securities. Organic growth = plant, premises, equipment External growth = acquisitions Sources: Acquisitions and disposals Research and development Investment securities
Financing activities Financing = external Debt and equity transactions Sources: Bank loans Issue of stock Issues of debts Examples of analysis Principle reasons for sustaining cash position Issue of X ordinary shares for X amount Major decrease of inventories, releasing X amount of cash Reduction in debtors, releasing X amount of cash Receipt of X in long term loans Relevant comments on other significant cash movements Increase in creditors, saving X amount of cash High capital expenditure on X amount of fixed assets Payment of X years dividends Payment of X years tax liability Continuing operating profits before tax of X and a major decrease of gross profit