Cash Flow Analysis Key Terms

Use key terms to understand cash flow analysis application for your business

You can use cash flow analysis to determine the value of a company, project or financial instrument. Unlike the balance sheet, a cash flow statement isn't subject to accounting subterfuge. In other words, a company cannot use accounting tricks to inflate its cash flow statement. That's why a cash flow analysis is such a useful business tool. Cash flow analysis can be determinative in deciding whether to purchase an investment, continue a project or figuring out the profitability of a business.

Below are cash flow analyses key terms that will help you understand the process:

 

Cash flow statement

The cash flow statement is unlike other financial statements in that it doesn't include any credit accounts. This statement explains where the business money is coming from and where it's spent. The cash flow statement is the primary source of information in a cash flow analysis. The cash flow statement has three main sections: operating, investing and financing.
Try: Review the cash flow statement tutorial available at Investopedia. For detailed instructions regarding the cash flow statement, examine the courses at the Accounting Coach.

Free cash flow

Free cash flow is the amount of money a company has at the end of a quarter or fiscal year after paying all of its bills. In its simplest form, free cash flow is cash flow from operations minus capital expenditures. In a publicly traded company, a dividend payment to shareholders may be the best use of the free cash flow. However, some companies want to maintain a certain level of cash on hand at all times.
Try: For a definition of free cash flow, evaluate the information from Investor Words. Quick MBA is another resource for a detailed explanation of free cash flow.

Indirect and direct analysis

There are two types of cash flow analysis, indirect and direct. Indirect is the most common form and is usually simply called cash flow analysis. The direct method is less involved but not nearly as common.
Try: Use the indirect method primer at Financial Education to learn more. Review the direct method tutorial available at GoogoBits.

Cash flow from operations

The first section to review during a cash flow analysis is the cash flow from operations. Often called operating cash flow, this is all revenue minus any operating expenses.
Try: Assess the resources on analyzing cash flow from operations at Value Based Management.

Cash flow from investing activities

This section of the cash flow statement shows the amount of cash gained or lost from investment in financial vehicles and investments in plant and equipment.
Try: Examine the explanation of the cash flow from investing activities section from Conoco Phillips.

Cash flow from financing activities

Financing activities include the issuance or selling of stock, the paying of dividends and loans payments and modifications. Again, this section is for cash activities only.
Try: Study the cash flow from financing activities tutorial offered at Virtual Advisor Interactive.

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