Statement of Cash Flows

The statement of cash flows shows the cash provided by and used by the operating, investing, and financing activities of a company during the reporting period. Operating activities relate to a company's primary line of business - its primary revenue generating activities. The cash flows (either positive or negative) from operating activities are generally the cash effects of transactions included in the income statement.

Investing activities include lending money and collecting on those loans, and the buying and selling securities. Here again, cash flows can either be positive or negative meaning that the company under review either increases or decreases the amount of cash and cash equivalents on hand.

Financing activities include borrowing money from creditors as well as repaying the amounts borrowed. It also includes obtaining resources from owners and providing owners with both a return on their investment and at some point in the future a return of their investment.

For the credit manager, this is not simply an accounting exercise. One of the more important elements of financial statement analysis involves determining whether or not the customer has positive or negative cash flow. From the credit manager's point of view, the simplest way to interpret cash flows is to determine whether the customer under review is generating positive cash flow - or in the alternative is using cash and cash equivalents faster than it can generate them. Clearly, no company can sustain negative cash flows indefinitely.

Source: Michael Dennis, author of "Credit and Collection Handbook" available at the NACM Bookstore.