Cash flow statement tutorial. How does a cash flow statement work? How do cash balance and cash flow relate to each other? What is cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities? You will find all of these explained in this Finance Storyteller video, including an example of the cash flow statement for Shell (AMS: RDSA).

⏱TIMESTAMPS⏱
0:00 Introduction
0:16 Cash flow statement definition
0:37 Cash balance and cash flow
1:15 Cash is King
1:30 Cash flow as a reflection of strategy
1:56 Cash flow statement example
3:39 Cash from operating activities CFOA
4:13 Cash from investing activities CFIA
4:35 Cash from financing activities CFFA
5:03 Cash flow statement analysis
7:54 Understanding cash flow

The Shell cash flow information featured in this video relates to 2016. Want to have a look at the revenue, margins and cash flow based on the very latest quarterly financial information, then browse through the information on Shell on the Simply Wall Street site: https://bit.ly/3FCljmT

The cash flow statement is one of the three main financial statements. As the cash flow statement explains how much cash has come in and gone out during a year, and what the sources and uses of this cash flow were, you could see the cash flow statement as an explanation of how the cash balance (one of the most important assets) has developed between two balance sheets.

Cash is king. It is critical at every stage of a company’s lifecycle. When you open your own business, you need cash to get started. You will need cash to grow and expand. If a company runs out of cash to pay its bills, it’s game over.

What you see in a #cashflowstatement should be a direct reflection of a company’s strategy. Is the company spending enough to build its unique and sustainable competitive advantage? Are customers willing to pay for the products and services that the company supplies? Is the company able to reward its investors for the risk they have taken, by paying a dividend? These and other questions can be answered by analyzing a cash flow statement.

It’s nice to have the total numbers of the cash balance as well as the total net cash flow, but it doesn’t tell us much yet about what goes on inside the company. To get a more meaningful look, we have to drill a level deeper into cash flow. That’s why a cash flow statement is split into three sections. The first section will have the word “Operating” in it, the second “Investing”, the third “Financing”.
Many companies will call the first section “Cash From Operating Activities” or CFOA, or a variation on that wording like “Cash Flow From Operations”. Cash From Operating Activities is roughly the cash inflow from customers paying the company minus the cash outflow of the company paying for purchases from suppliers, minus the cash outflow of salaries paid to employees, and minus the cash outflow of taxes paid to governments. For most mature companies in good health, the cash flow from operating activities is a net cash inflow.
The second section is often called “Cash From Investing Activities”, or a variation on that wording. This is where Capital Expenditures (a cash outflow), acquisitions (a cash outflow) and divestments (a cash inflow) are recorded. Cash From Investing Activities tends to be a net cash outflow for most companies in most years.
The third section is often called “Cash From Financing Activities”, or a variation on that wording. This one can go either way: a net cash inflow or a net cash outflow. Does the company need money and attract new debt to finance itself? Then there will be a cash inflow. Does the company have a lot of cash on its balance sheet and no plans to put that cash to any productive use? Then the company might be paying a dividend to shareholders, which is a cash outflow.

Understanding cash flow is a key element of “getting the picture” of a company. As an investor, analyst, employee or supplier, it is advisable to understand both the actual numbers of past years, as well as the intent going forward.

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Philip de Vroe (The Finance Storyteller) aims to make #accounting, finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how #financialstatements work in order to make better investing decisions. Philip delivers finance training in various formats: YouTube videos, livestreams, classroom sessions, and webinars. Connect with me through Linked In!

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