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5 ways to analyse a cashflow statement, and why a strong understanding of your statement of cash flows is vital

The statement of cash flow (or cashflow statement) presents all the movement of cash into and out of an entity for a given time period. This information is useful for short-term decision making. #cashflows #cash #inflow #outflow #cashflowanalysis #businessadvice

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Due to the importance of cash and cash management, information relating to explicit movement of cash needs to be included in the financial statements. The statement of cash flow (or cashflow statement) presents all the movement of money of an entity for a given time period. Users of financial statements – such as business managers or owners – will analyse cash flows for short-term decision making.

Breaking down the cashflow statement into groups of cash flows

The various cash flows of an entity are grouped together according to how they have been generated or used by the entity. Cash flows are grouped into the following three main activities:
  1. Operating activities – These are the main revenue-producing activities of the entity that are not investing or financing. Operating cash flow includes cash received from customers and cash paid to suppliers and employees. It does not include depreciation and amortisation or recognised income which has not yet been received or expenses which have not yet been paid.
  2. Investing activities – These activities relate to the buying and selling of fixed assets and the increase or decrease of investments that are not considered to be cash equivalents.
  3. Financing activities – Looks at how a company is funded, either through debt or equity. Were there additional loans acquired or issued shares. This is useful to investors wishing to predict any future claims on the cash of the entity.

Analysing your statement of cash flows

Cash flow is the essence of any business. If the cash flow is inadequate, the entity will be unable to meet its future financial obligations and will be forced ultimately to either curtail or cease operations. As a result, most analyst consider the analysis of cash flow as one of the best indicators of financial stability in conjunction with other financial statements . Examples of ratios used to analyse the cash flow would include:
  1. Cash flow to total debt – This cash flow ratio measures the cash flow generated from trading activities in relation to total debt. It is calculated as follows: cash flows from operations divided by total debt.
  2. Quality of earnings – This ratio analyses the percentage of income that is due to higher sales volume or a reduction of costs. It can be calculated as follows: operating cashflows divided by profit.
  3. Acid test ratio – This ratio measures the ability of an entity to pay its current liabilities with current assets without having to sell its inventory. However, it might not give a reliable picture if accounts receivable take longer than usual to recover. It is calculated as follows: current assets (excluding inventory) divided by current liabilities.
  4. Interest cover – This ratio measures the ability of the entity to cover its finance costs. It is calculated as follows Earnings before Interest and Tax (EBIT) divided by interest. On a cash basis we can calculate it as follows, cash generated from operations divided by interest. This ratio shows the number of times operating profit or cash can cover interest costs.
  5. Return on Assets – This ratio speaks to the investment made into the assets and what is the return of that investment. This ratio is calculated as follows: EBIT divided by total assets.

Speak to us about your statement of cash flows and understand what it means for your business.

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Managing cash flows efficiently is vital for the overall financial health of a business. If you would like to understand your financial statements, cash position and future outlook in more depth, arrange an advisory session today. We’ll help you identify and appreciate the strengths of your business. You may email us at or call 011 025 1446 (Johannesburg) and 021 003 8000 (Cape Town)

Insight by:

Aziz Ndara

Management Consultant

Kettle Consulting (PTY) Ltd

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