The Three Sections of a Cash Flow Statement
To read a cash flow statement, it helps to know its three main sections:
- Operating Activities
- Shows cash generated from day-to-day operations.
- Includes revenues (grants, taxes, fees) and expenses (payroll, utilities, supplies).
- Positive cash flow here indicates healthy core operations.
- Investing Activities
- Reflects cash used for or generated from long-term assets.
- Includes capital projects, equipment purchases, or proceeds from asset sales.
- Negative numbers here aren’t always bad, they may simply reflect investments in growth.
- Financing Activities
- Captures cash from borrowing and repayments.
- Includes bond issuances, loan proceeds, principal payments, and interest.
- Shows how an organization funds operations and projects beyond normal revenues.
How to Interpret the Results
- Look for positive cash flow from operations as this shows sustainability.
- Compare investing and financing activities to understand how projects are being funded.
- Watch the net change in cash at the bottom; it shows whether cash balances increased or decreased during the period.
- Consider the timing of inflows and outflows: seasonality or delayed funding can create short-term gaps even if overall cash flow is positive.
What’s important here?
Reading a cash flow statement means analyzing operating, investing, and financing activities to see how money is moving in and out of the organization.
Positive cash flow from operations is a key indicator of financial health, while investing and financing activities provide context on growth and funding strategies.
The bottom line, net change in cash, shows whether the organization is building or spending down reserves. Together, these insights help leaders make better decisions, ensure obligations are met, and maintain financial stability.
