Statement of Cash Flows: Net Cash from Operations, Investments and Financing

Video #11

Transcript

Let’s take a couple of minutes to look at the statement of cash flows in greater detail. Then I’ll get into an example that brings all this together.

The statement of cash flows is broken into three sections:

1. Cash from operations, which you already have seen — it starts off with the cash from net income and then makes adjustments, up or down, related to whether or not customers are paying us this month or they’re paying us later. And then adjustments up or down depending on accounts payable, whether we are paying our suppliers this month or whether we are delaying payments to suppliers.

2. Cash from investing. This is investments that the company makes. This is not investments that others make in the company. The company can make investments by buying a building or by buying equipment and those things are then used for the company to generate additional cash.

3. Cash from financing is where we get bank loans and also where outside investors will purchase stock in the company.

Here’s a quick example with numbers so you can see how this adds and flows.

Net income is $5,000 of profit this month;

Accounts receivable went up ($4,000), which adversely affects our cash; and

Accounts payable also went up ($2,000) and when accounts payable goes up, that improves our cash position.

We subtotal this ($5,000 minus $4,000 plus $2,000) is $3,000.

We spent $15,000 on a piece of equipment, so that’s cash going out. Total cash from investing is minus $15,000.

We took a bank loan of $10,000, so that’s cash in. We also had a founder put in an additional $25,000 worth of cash. Therefore, cash from financing is $35,000.

Then we total each of these three sections ($3,000 minus $15,000 plus $35,000) is $23,000.

Cash at the beginning of the period was zero. Therefore, cash at the end is $23,000, with a double-underline to show that we’re at the end.

I hope you can see that the statement of cash flows tells a pretty clear story of the comings and goings of the cash in the period. It does take a bit of practice though, particularly things like accounts receivable, which seem to be a little counter-intuitive.

As you’re going through it, just make sure that you’re asking yourself the question: is more cash coming in or is more cash coming out? If cash is coming in, then it’s a positive value like here ($5,000). If cash is coming out, like when we spend money on equipment, then it’s a negative value (minus $15,000). If you stick by that rule of thumb, that will help you get through this. Then, of course, you should just be practicing looking at your statement of cash flows every single month.

You’re just about to graduate! Just one more video where we bring this all together and then you’re done. Way to go.

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