Elements of Cash Flow Analysis

A cash flow statement includes both the sources and uses of cash—categorized into three key sections:

1. Operational Activities

This section reflects the cash generated from core business operations. It includes net income, adjusted for items like one-time charges, depreciation, accounts payable and receivable, and deferred taxes. This is the money your company earns from day-to-day business.

2. Investment Activities

Here, the statement outlines money earned or spent through investments. Examples include revenue from selling assets or stock, purchasing equipment, or paying dividends. These activities show how the company is reinvesting in itself or returning value to shareholders.

3. Financing Activities

This section focuses on external financing. It includes inflows like new loans or capital investments, and outflows such as loan repayments. This area reveals how your company is funded and how it’s managing its debt.

What Is Free Cash Flow?

Free cash flow (FCF) is the cash remaining after all operating expenses and capital expenditures have been paid. Unlike profit, which can be skewed by accounting practices like depreciation, free cash flow provides a more accurate measure of your company’s financial strength.

Consistent negative free cash flow may indicate overspending or insufficient revenue. On the other hand, positive free cash flow means your business has money to reinvest, expand, or save for downturns—something investors look at closely when evaluating a company.

Create a Cash Flow Budget

Once you’ve analyzed your cash flow, use the insights to build a cash flow budget. This budget projects expected cash inflows and outflows, helping you plan for future expenses and income. A cash flow budget can also reveal seasonal trends—such as cash surpluses or shortfalls—so you can prepare by adjusting spending or seeking financing during lean times.

While no budget can predict the future perfectly, understanding your company’s cash flow trends enables you to make smarter, more informed financial decisions.