How to easily analyse the Cash Flow Statement of a company?🧵
A company sold 10 pens worth Rs 10 each. But 5 pens are sold on credit (the buyer will pay Rs 50 in the future).
Total revenue = Rs. 10 x 5 = Rs. 50
The company pays back a debt of Rs 60 that was taken to produce the pens. Here’s what its cash flow statement looks like:
Total revenue = Rs. 10 x 5 = Rs. 50
The company pays back a debt of Rs 60 that was taken to produce the pens. Here’s what its cash flow statement looks like:
What is a cash flow statement?
It records cash inflow and cash outflow from the company.
It tells how much cash the company is generating.
It records cash inflow and cash outflow from the company.
It tells how much cash the company is generating.
What is cash?
Cash comprises cash on hand, deposits in bank, and any other investment which can be easily converted to cash.
Cash comprises cash on hand, deposits in bank, and any other investment which can be easily converted to cash.
Cash coming in the business is cash inflow.
Ex: You sell goods worth Rs. 500 on credit. During the year you receive Rs. 200 - this is a cash inflow.
Ex: You sell goods worth Rs. 500 on credit. During the year you receive Rs. 200 - this is a cash inflow.
Cash going out of the business is cash outflow.
Now you buy goods worth Rs 500 on credit. During the year you paid Rs 200. Rs. 300 yet to be paid.
Payables reduce by Rs. 200 → Cash outflow of Rs. 200
Now you buy goods worth Rs 500 on credit. During the year you paid Rs 200. Rs. 300 yet to be paid.
Payables reduce by Rs. 200 → Cash outflow of Rs. 200
Cash flow follows this simple rule:
Cash inflow → Increase in cash, decrease in asset, increase in liability
Cash outflow → Decrease in cash, increase in asset, decrease in liability
Cash inflow → Increase in cash, decrease in asset, increase in liability
Cash outflow → Decrease in cash, increase in asset, decrease in liability
Three main key activities from which there is cash inflow and outflow:
Operating activities
Investing activities
Financing activities
Operating activities
Investing activities
Financing activities
PAT is calculated after deducting expenses like tax and depreciation, and adding incomes like dividend income, interest income,etc.
But do all expenses and incomes result in cash inflow or outflow?
Are all these related to operating activities?
Ans: No
But do all expenses and incomes result in cash inflow or outflow?
Are all these related to operating activities?
Ans: No
Cash flow from operating activities
From the PAT, only cash inflow and outflow related to the core business operations is to be calculated.
From the PAT, only cash inflow and outflow related to the core business operations is to be calculated.
Cash flow from investing activities. This includes investments such as purchase of machinery, stocks, and FDs.
Let’s take an example - What are HUL’s investing activities?
Cash flow from financing activities
What are HUL’s financing activities?
It has a cash outflow, mostly due to payment of dividends and payment towards lease.
It has a cash outflow, mostly due to payment of dividends and payment towards lease.
Addition of cash inflow and outflow from operating, investing and financing activities tells the amount of cash generated or consumed during a year.
How much cash has HUL generated or consumed?
HUL has consumed total cash of Rs 695 crores during the current FY and Rs 1674 crore in last FY
HUL has consumed total cash of Rs 695 crores during the current FY and Rs 1674 crore in last FY
You had Rs. 100 at the beginning of the year. During the year you earned cash Rs. 200.
How much cash do you have at the end of the year?
Rs. 100 + Rs. 200 = Rs. 300
How much cash do you have at the end of the year?
Rs. 100 + Rs. 200 = Rs. 300
How much cash does HUL have at the end of the year?
The company has Rs 1147 cr in cash at the end of the year.
Rs. 1147 crore is the same amount that is there in the balance sheet of the company.
The company has Rs 1147 cr in cash at the end of the year.
Rs. 1147 crore is the same amount that is there in the balance sheet of the company.
Along with the balance sheet and income statement, cash flow statement is one of the 3 main financial statements filed by companies. To know how to easily analyze the balance sheet and income statement, please refer to our earlier threads.
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