The definitive guide to Managing the Numbers
The definitive guide to Managing the Numbers
The definitive guide to Managing the NumbersThe definitive guide to Managing the Numbers

Chapter 16 – Watching Cash Flow

‘Profits are an opinion, cash is a fact.’
Anon.

Overview

This chapter covers the cash flow statement, the third of the three major financial statements (see also the profit and loss account and balance sheet covered in the previous two chapters). Cash flow is simply a rearrangement of the figures already encountered. Its simplicity can be judged by the shortness of the list of new beanie buzz words for this chapter. However, this is not to say that the cash flow statement is not important. It reveals sources and uses of corporate funds: how cash is generated by operations and financing and used in investing (but note that any one of these three sources and uses could reflect net inflows or outflows).

Mastering

After reading this chapter, you should be able to answer the following questions:

  • What are the main sources and uses of funds that are shown in the cash flow statement?
  • Can you list ten things that a cash flow statement reveals? Why are they important?
  • When might operations generate a deficit (negative cash flow)?
  • Why is it important that operations should generate a surplus (positive cash flow) in the longer run?
  • Do the three categories of investing activities relate to (1) fixed assets, (2) the acquisition of debt and equity of other enterprises, and (3) advances and loans made to or repaid by third parties?
  • Are the categories of financing activities (1) issues and redemption of equity, (2) issues and redemptions of debt instruments, and (3) other borrowing and repayments?
  • When is it easier to construct a cash flow statement directly from receipts and payments, and when is it faster to generate it indirectly by starting with net profit and working backwards? Are the end results the same?
  • Where are taxes shown in cash flow statements?
  • What is free tax flow?
  • How would you use the figures from the previous few chapters to project cash flow?
The Definitive Guide to Managing the Numbers