Continue the Learning: Analyzing Your Company’s Cash Flow
eliza hl
Published Date
Objective: To enhance your understanding of cash flow management and develop your ability to analyze real-world financial statements.
💡 New here? Start with What is a Statement of Cash Flow?
Before diving into cash flow analysis, make sure you understand how the Statement of Cash Flow is structured. Part 1 walks through its key components and how they fit into financial reporting.
Read What is the Statement of Cash Flow here
Instructions
Step 1: Select a Company for Analysis
Choose a company to examine—this could be your own company, a customer, a competitor, or a company you are considering investing in. Make sure you have access to its financial statements for the most recent reporting year and at least one or two prior years.
Step 2: Locate the Cash Flow Statement
The document may be listed under different names, including:
- Statement of Cash Flows
- Statement of Changes in Cash
Ensure you are reviewing the full Cash Flow Statement, which details cash movements across operating, investing, and financing activities.
Step 3: Compare Cash Flow Over Two Years
Analyze the statement for the two most recent years, focusing on these key areas:
- Cash Flow from Operations – How much cash is generated from core business activities?
- Changes in Non-Cash Working Capital – How have receivables, payables, and inventory impacted cash flow?
- Changes in Long-Term Investments (e.g., Property, Plant & Equipment purchases or sales).
- Changes in Financing Activities – Has the company taken on new debt, repaid loans, or issued dividends?
Step 4: Identify Key Changes and Trends
Look for significant shifts in cash flow patterns:
- Are there unexpected increases or decreases in cash flow?
- Did any major business decisions, market changes, or external factors contribute to these shifts?
- Are there one-time events or unusual items impacting the statement?
- Check the Notes to the Financial Statements for additional explanations.
Step 5: Interpret the Findings
Ask yourself:
- Did cash flow from operations improve or decline?
- Were there major investments or divestments?
- Did the company significantly increase or pay off debt?
- What do these cash flow changes suggest about the company’s financial health and strategy?
Final Thought
This exercise helps develop business acumen and critical thinking skills by engaging with real-world financial data. The more you practice analyzing cash flow, the better you'll understand how businesses manage liquidity, investments, and financing decisions.
Happy analyzing!
