7. Fundamental (Micro) “Cash Flow Statement”

     Cash Flow Statement (CFs) is very important in terms of predicting a future cash. The question is why don’t we just look at assets of the company? Are they the same thing? Some parts they are the same, but some are different. If I need to explain their differences, I would say cash is a subset of asset. Asset has many classes ranged from the lowest to highest liquidity. The highest liquidity is cash (might not be true in the present because credit card or online payment might be faster J). The reason that we want to know the cash balance of a company is if a company has no cash on hand at any time, a company may go bankrupt. It’s true that if any company has no cash, it could possibly borrow or OD from a financial institution. However, in the case that a company has no cash at some points, it means a company has a hard time maintaining the cash balance. As a result, that company might not have a capability to borrow more from any place.

     Another way you can think how important the cash is. You think of yourself having everything; house, car, etc. but you don’t have cash. Soon, you will have a hard time living your life and you might need to sell your assets to get some cash. So, people want your cash not your house or car (if they can choose). This analogy is the same as the borrower and lender. If you don’t have enough money to pay for your lenders, they can drag you down to the hole of bankruptcy.

     So, let’s look at how the cash flow statement is constructed. Cash flow statement consists of three activities.

      1. Operating

      This activity is related to day-to-day operation (e.g., collecting cash from customer, interest or dividend return).

      2.   Investing

  Investing activity is buying/selling some assets that generated revenue for a company for a long time, such as building or machine.

      3.   Financing

  The transaction involves in this category is about lending or borrowing money, such as issuing stock or bond.

The following is the sample of cash flow statement.

Source:http://www.unleashingideas.org/global-entrepreneurship-library/sites/grl/files/biz_resources_book-4.pdf