Have you ever looked at an official financial statement from the company you work for? Did it make sense to you? If the answer is no or you can’t remember, keep reading. Continuing on with our FM’s Guide to Accounting series, this week will cover The Statement of Cash Flows.
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I have taken multiple classes in finance, but I am still not an accountant and neither are you. These things can get confusing for a few reasons. First, there is no standardized mold that all organizations use for all of their accounts. This means you’re going to see financial jargon that you won’t necessarily recognize because it won’t fit into a model of the “normal” company’s financial statement you might have seen previously. Second is the fact that you must have context to understand financial statements. Management decisions, the economy, changes in technology, etc., all affect what you see on financial statements. Third, people create these documents and those people are fallible. This is not an exact science. My goal here is for FMs to have a basic, but solid, understanding of what financial statements are, what information you can obtain from them, and why that might be useful to you.
Financial statements can be found in the organization’s annual report. There are three main types that you should be familiar with as a facility manager: the income statement, the balance sheet, and the statement of cash flows. Last time we covered the balance sheet and today we will cover the statement of cash flows.
The Statement of Cash Flows
The statement of cash flows (or cash flow statement) shows the levels of cash across a reporting time period. The information is then used to determine if the organization can pay liabilities when they are due. This statement is a merger of the income statement and the balance sheet by reconciling the information in operating (cash from regular business revenue), investing (cash from buying and selling assets), and financing activities (cash from debt and equity). This statement will also include any dividends paid or cash spent to repurchase stock. The cash flow statement differs from the other financial statements, however, because it doesn’t show future inflows or outflows of cash (these have been recorded on credit).
The figure to the right shows an example of what a statement of cash flows might look like:
In this example of Company A’s statement of cash flows, I did not use numbers from the previous income statement and balance sheet in previous posts for simplicity. However, I want to point out that cash inflows appear as positive numbers and cash outflows appear as negative numbers (in parentheses).
Cash flow in the statement is broken down into three major components: cash from operating activities, cash from investing activities, and cash from financing activities. Operating activities are those that comprise an organization’s core business practices. Investing activities typically consists of organizations buying or selling assets such as equipment, buildings, or securities. Financing activities consists of raising capital (e.g., issuing bonds), which is a cash inflow and cash outflows from financing (e.g., paying dividends or interest).
When it comes to daily facility management duties, you will not utilize cash flows in your daily decision-making. However, you should be familiar with the subject. Cash flow statements from one year will help you predict future cash flows in the next year. This definitely can help with budgeting. Also, investors use the cash flow statement to gauge the overall financial health of a company. Arguably, the more cash a company has, the better (sometimes an aggressive growth strategy will lead to negative cash flows in a very healthy company).
Financial statements typically have notes associated with them to provide a more complete picture of the reporting period beyond just numbers. To evaluate the financial health of an organization, you need to understand the notes, which provide meaning to the numbers.
The statement of cash flows is an important document because you can understand not only exactly what the financial position of the organization is, but also how they operate and leverage debt. Understanding this gives you an insight into where the organization will go in the future, how aggressive they will be, and if they are in financial trouble. Join me in the next part of our Intro to Accounting Series as we explore how to analyze these financial statements.