Join Jim Stice for an in-depth discussion in this video Statement of cash flows, part of Finance for Non-Financial Managers.
- The third primary financial statement is the statement of cash flows. Conceptual, the statement of cash flows is quite simple. Cash in, cash out. The inside of accountants is to separate those cash flows into three categories, operating activities, investing activities, and financing activities. Those three categories of cash flows are what are reported in the statement of cash flows. Now, operating activities are what companies do every single day. They collect cash from customers, they pay cash to buy inventory, they pay cash to employees, for rent, for advertising, for research and development.
All of those things are operating activities. Think of operating activities as the things that a business does every single day. And hopefully, a company would generate cash from its operating activities. You would hope that a business would be collecting more cash than it spends on a daily basis. The second category in the statement of cash flows is investing activities. Investing means investing in the productive capacity of the business, buying machines, buying land, buying buildings. Those are investing activities.
In contrast to operating activities, which happen every single day, investing activities happen occasionally. You don't buy land and buildings every single day. You do that on occasion. Operating activities are things that a business does every day. Investing activities, investing in the productive capacity of the business, happen occasionally. The third category in the statement of cash flows is financing activities, and that is exactly what it sounds like, financing, borrowing money, repaying those loans, getting cash from investors, paying dividends to investors, getting the capital or financing to buy the assets that a business needs.
Now, a way to think of the statement of cash flows is with financing activities, I'm getting the financing that is the capital to buy the assets, the investing activities, to then conduct the operations, the operating activities. These are the things that a business does. The statement of cash flows is built around operating, investing, and financing activities. Let's look at examples of the statement of cash flows for three companies about which you may have heard, Coca-Cola, Exxon Mobile and Wal-Mart.
First thing I want you to look at is, well look at the statement of cash flows for ExxonMobile. Particularly, look at their Investing activities. Billions upon billions of dollars of investing activities, investing in the productive capacity of these businesses. This business needs larger machines and buildings and equipment and lots of land, and you see that reflected in the investing cash outflows of ExxonMobile. These are often called capital expenditures, or CapEx. Now, I want you to look at the statement of cash flows for Coca-Cola and Wal-Mart.
We call these cash cows. The reason we call them cash cows is their operations generate more than enough cash to pay for all of their investing activities with cash left over. They're generating a lot of cash. Wouldn't you like to be a personal cash cow, where your daily cash flows were enough to pay for all your cars and your houses and your land and everything else you needed to buy in cash. That's Coca-Cola. That's Wal-Mart and that's ExxonMobile. Now, let's step back and remind ourselves why an understanding of these three financial statements is important.
If you are ever in a position of negotiating with another company, and find yourself wondering about the company's long-term viability, you will want to know a little something about their financial position. Well, their financial position is summarized quite nicely with using these three financial statements. These three financial statements may not tell you everything about a company's future, but they do tell you a lot.
- Interpret financial reports and make decisions based on available data
- Manage inventory and receivables
- Create an accurate budget
- Cost a product or service
- Analyze customers
- Understand your income taxes
- Communicate your contribution to the bottom line