Getting Started: The Statement of Cash Flows

Net Cash Flows = Cash Position

The net cash flows at the bottom of the statement of cash flows are the sum total of the effects of operating, investing and financing activities on a company's cash position.

A strong cash position is important because it can say a lot about how liquid the company is and how secure its future is if it begins to fall on some tough times ("Booyah Breakdown: Liquidity"). When money's not coming in, companies that can't support themselves with cash and other assets often face the chopping block. A decent amount of cash on hand can help ensure that this won't be the case.

Analyzing Cash Flows

Even though the statement of cash flows is less popular than its siblings -- the income statement and balance sheet ("Getting Started: The Income Statement, The Balance Sheet" ) -- it's probably the easiest financial statement to look at to from an analysis perspective.

The statement of cash flows is a relatively simple document to understand. It tells you straight up how much cash a company spent (outflows) and how much cash it has (inflows). Naturally, when cash inflows are greater than outflows, it's a favorable situation for a company.

Still, don't let a little red ink (or a number in parentheses) in the investing section scare you off from a company. Remember, spending money on investing activities can be necessary for the greater (long-term) good of a company.