The Cash Flow Statement

The last of the three financial statements is the cash flow statement. To most people, the cash flow statement is of least importance and perhaps that is why it is always found after the other two. However, it is also where you can find the truth about companies. As academics put it, it is easy to manipulate earnings, costs or even sales but it is much harder for companies to manipulate cash flows.

Cash flow measures the actual inflow and outflow of cash into and out of the firm. Hence while sales can be manipulated (e.g. by recognising sales from the future), a cash outflow is a cash outflow. A company that has a poor cashflow is something to look out for. It is usually an early warning for bigger trouble to come. Avoid at all cost.

The cash flow statement is also further classfied into various sub segments namely
1) The cash flow from operations or operating cash flow (CFO)
2) The cash flow from investments or investing cash flow (CFI)
3) The cash flow from financing or financing cash flow (CFF)
The most important no. to look out for is undoubtedly the operating cash flow. This no. measures the actual cash inflow from the firm's core operations and it should always be a positive number. If it is not, it means the company cannot earn money from its businesses and all alarms should sound and you should sell the stock if you own, and avoid at all cost if you don't.