What Is a Cash Flow Statement?

The cash flow statement is one of the most important financial statements, showing how much cash a company’s business is actually generating. To start exploring the cash flow statement, let us begin with the following example:

Suppose you run a simple coffee shop that sells only coffee and snacks. All of the shop’s sales are in cash, meaning that if customers want a cup of coffee and a snack, they need to bring enough money to pay for them; no credit. Assume the shop charges VND 25,000 for a coffee and VND 30,000 for a snack. The shop then records VND 55,000 for this combo as revenue in the income statement, and the cash it collects is also VND 55,000. Everything is very clear.

Now take another example: a shop selling laptops. Again, assume the shop sells just one laptop model at VND 25 million each. In one day, the shop sells 20 laptops, so revenue is easy to calculate: VND 25 million  x 20 units = VND 500 million. But what if 5 of the 20 laptops are sold on credit? The customers take the product today but will pay cash a month later. In that case, the actual sales break down as follows:

Cash sales: 15 x 25 = VND 375 million

Credit sales: 5 x 25 = VND 125 million   

Total revenue: VND 500 million

If the shop records its total revenue in the income statement, VND 500 million of revenue looks good. However, the cash that actually lands in the company’s bank account straight away is only VND 375 million. What if the company had a VND 400 million loan that had to be repaid urgently within the month? It would be in a cash crunch, unable to meet its debt obligations.

The cash flow statement is presented as an integral part of the financial statements. It shows the company’s actual cash flows during the period, including the cash it actually received and actually paid out. Assessing the cash flow statement is therefore extremely important, and we will look at it in depth in the next section.

A company’s activities

To understand the cash flow statement better, we first need to understand the activities that generate a company’s cash flows. If you think about a company and its various business activities, you will realize that they can be classified into one of three main groups: 

1. Operating activities (OA): activities related to the company’s core day-to-day business are collectively called operating activities. Typical operating activities include sales, marketing, production, technology upgrades, hiring staff and so on.
2. Investing activities (IA): activities involving investments the company makes in order to earn a profit at a later stage. Examples include lending and term bank deposits, equity investments in other entities, and investments in land, property, plant and equipment, intangible assets and other non-current assets.
3. Financing activities (FA): activities covering all of the company’s financing transactions involving debt and equity, such as paying dividends, paying loan interest, issuing corporate bonds and issuing additional shares.

Every activity a legitimate company carries out can be classified into one of the three groups above.

Let us take the example of a specific business: a fitness centre. Some of its activities might include:

1. Running advertisements to attract new customers – OA
2. Hiring fitness trainers to help customers with their workouts – OA
3. Buying new fitness equipment to replace old equipment – OA
4. Seeking a short-term loan from banks – FA
5. Issuing bonds to raise capital – FA
6. Issuing new shares to some friends and acquaintances to raise new capital for expansion – FA
7. Investing in a start-up focused on innovative fitness programmes – IA
8. Placing a term deposit with a bank – IA
9. Investing in a soon-to-open building nearby, to open a new fitness centre in the future – IA
10. Upgrading the sound system so customers have a better workout experience – OA

We can see that:

Net cash flow of the company = Net cash flow from operating activities + Net cash flow from investing activities + Net cash flow from financing activities

The cash flow statement in practice

Reviewing a company’s cash flow statement means looking at the company from the perspective of its actual cash flows. When companies present their cash flow statements, they usually split them into three sections to show clearly how much cash the company generated from its three main activities. Let us look at an example: the cash flow statement of Mobile World Investment Corporation (MWG):

The cash flow statement in practice

Looking at net cash flow from operating activities, we see that MWG generated more than VND 171,390 million from its operations. A company with positive operating cash flow is always a sign of good financial health.

Below is a snapshot of MWG’s cash flows from investing activities:

Cash flows from investing activities

Unit: VND

We can see that MWG spent more than VND 11,254 billion on its investing activities. This is intuitive, since investing activities tend to consume cash. Healthy investing activity signals to investors that the company is serious about expanding its business. Of course, how much counts as healthy and how much does not is something we will explore in a later article.

Finally, here is a snapshot of MWG’s cash balance from financing activities:

Cash flows from financing activities

 Unit: VND

MWG recorded net cash flow from financing activities of VND 7,877 billion. Much of MWG’s financing cash flow went toward repaying loan principal. If MWG takes on new borrowing in the future, that will increase net cash flow from financing activities (remember that an increase in liabilities, a source of funds, means an increase in the cash balance).

Now let us summarize the cash flows from all activities:

Total cash flow from the three activities above
The table above shows that the company had a total net cash outflow of more than VND 3,205 billion for fiscal year 2021. But what about the year before? As we can see, the company generated more than VND 4,232 billion through all of its activities in the previous year.

Note that the closing balance at the end of 2020 is the opening balance for fiscal year 2021. You can see this in the cash flow figures MWG provides for the year ended 31 December 2021.

Conclusion

The cash flow statement tells us about a company’s ability to generate cash and the actual cash inflows and outflows during the period. Cash flows are classified into operating, financing and investing activities. 

Happy Trading!

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