Imagine a business, maybe a very well-established ice cream centre with a sound corporate structure. What are the typical business activities you think an ice cream centre would have?

· Sale of Ice Creams
· Purchase of milk, ice, fruits, dry fruits
· Display advertisements to attract new customers
· Hire employees to serve customers
· Seek short-term loans from bankers
· Issue new shares to a few known friends to raise fresh capital for expansion (also called preferential allotment)
· Invest in a startup company working towards innovative ice cream flavours
· Park excess money (if any) in fixed deposits
· Invest in a building coming up in the neighbourhood, for opening a new centre sometime in the future
· Upgrade the sound system for a better experience

As you can see, the above-listed business activities are quite diverse; however, they are all related to the business and can be classified as:

· Operational activities (OA): Activities related to the daily core business operations are called operational activities. As you can see in the above example, the sale of ice creams, purchase of raw materials, advertisement display, employee hiring etc. form part of the operating activities of the company.

· Investing activities (IA): Activities about investments that the company makes intending to reap benefits at a later stage. Examples include parking money in fixed deposits, investing in assets like shops etc.

· Financing activities (FA): Activities about all financial transactions of the company such as issuing shares, raising debt, distributing dividends etc.

Now, you all might be wondering, all this is understood, but how will we get to know this information, that’s where the cashflow statement comes in…

A cash flow statement is a financial statement that provides an overview of how cash has flowed in and out of a business over a specific period. As the name suggests, this statement shows how cash flows in the business in different activities.

You might be wondering, we already have an idea about the Profit and Loss Account, why do we need to bother about the Cashflow statement?

The P&L statement primarily deals with revenue and expenses, which may not necessarily represent actual cash transactions whereas the cash flow statement focuses on the actual cash movements in and out of a business during a specific period. It provides a clear picture of how cash is generated and spent.

Now, let us deep dive into different types of Cashflows appearing in the Cashflow Statement:

1. Operating Activities:

This provides valuable insights into a company's ability to generate cash from its core business operations. This section of the cash flow statement typically includes cash inflows and outflows directly related to the primary activities of the company.

Operating Cashflows include sale receipts, purchase payments etc. Now the net result arising out of all operating activities is reflected under this head in the cashflow statement.

A positive cash flow indicates that the company can generate cash from its operating activities and it helps in assessing whether the company's operations are sustainable. We should look for companies having positive operating cashflows.

Negative operating cash flow indicates that a company is using more cash than it is generating, which can be a sign of operational challenges or liquidity problems.

2. Investing Activities:

Cash flow from investing activities, as reported in the cash flow statement, provides insights into a company's investment in capital assets and other investments outside its core business operations. It reflects cash inflows and outflows associated with the acquisition and disposition of long-term assets and investments. Examples could include the purchase of fixed assets, acquisition of stakes in other companies etc.

Positive (Plus) investing cash flow in a cash flow statement implies that a company is divesting assets, and selling investments. It may signal asset sales, cost-cutting, or a focus on core operations. However, it can also indicate financial strain if ongoing investment is unsustainable.

Negative (Minus) investing cash flow in a cash flow statement suggests that a company is making strategic investments in assets, such as property or equipment, or acquiring financial instruments. It indicates potential growth, expansion, and a commitment to long-term value creation. We should look for companies having negative investing cashflows.

3. Financing activities

It provides insights into how a company raises and uses funds through financing arrangements. It reflects cash inflows and outflows associated with the company's capital structure, including its debt and equity financing.

Negative (Minus) financing cash flow in a cash flow statement suggests that a company is repaying more debt or equity financing than it is raising. It may indicate a focus on reducing leverage or returning value to shareholders, but it can also signal difficulties in attracting financing or servicing existing debt.

Positive (Plus) financing cash flow in a cash flow statement suggests that a company is raising more funds through debt or equity financing than it is repaying. It signifies capital infusions for expansion, dividends, or debt refinancing, indicating financial strength and capacity to support growth and meet obligations. Here, we need to look what is the source of funds raised, whether it is equity or whether is debt.

Now, coming to the gist of the entire discussion, a general thumb rule which we can remember is Negative cashflows from Operating Activities is a big red flag, Positive Cashflows from Investing Activities have to be looked at very diligently as they may arise due to sale of assets of the company, Cashflows from Financing activities show the stage of growth of the company viz, the positive cashflows show that the company is raising funds which it is going to deploy to grow its business, a negative cashflow shows that the company is giving out funds in form of debt repayments or dividends signalling the excess cash available with the company or no identified avenue for investment by the company.

However, as we all know that learning in Silos is not going to help us get a clear picture and hence it is very pertinent to consider the Balance sheet and Income Statement before forming any conclusions. To understand the nuances of financial statements, in a very simple and easy-to-understand language refer to my course on Fundamental Analysis.

Till then take care, Jai Hind, and bye-bye!!!