A key factor in successfully managing a business in today’s rapidly changing economy isn’t just about increasing sales — it’s about effectively managing“financial liquidity.”One of the most essential tools that every business owner and executive should understand is the “financial statement,” especially the “cash flow statement,” which is often overlooked. This article will help you understand the movement of cash flow — where it comes from, how it moves, and how to read it using common analysis methods. 

What is a Cash Flow Statement ?

A Cash Flow Statement (Statement of Cash Flow) is a financial report that shows the inflows and outflows of cash and cash equivalents within a business. It presents the movement of cash from various business activities over a specific period of time. 

• Income refers to the money a company earns from its business operations, such as revenue from selling products or providing services. 
• Expenses refer to the money a company must spend to operate its business, such as rent, equipment costs, employee salaries, and expenses for purchasing raw materials. 

Why is it important to understand the “Cash Flow Statement”?

Because the cash flow statement answers the critical question: “Does the business have enough cash on hand?” In reality, even a profitable business can go bankrupt if it lacks sufficient cash to pay debts, salaries, and other obligations. Understanding the cash flow statement also reveals the company’s financial structure — whether it is taking on debt, repaying loans, or issuing dividends. 

For example, a company might have sales of 10 million baht and a profit of 1 million baht, but if 8 million baht of that revenue remains unpaid by customers, the company could face a cash flow shortage if payments are not collected on time. This means that, despite appearing to be “profitable,” the business could still suffer from a lack of financial liquidity.

What are the 3 activities shown in a cash flow statement? 

Krungthai Bank providesan interesting explanation that the cash flow statement is divided into three main activities, reflecting the company’s liquidity, sources of funds, and cash expenditures, as follows: 

1. Cash Flow from Operating Activities (CFO)

This refers to the cash flow generated from business operations, including cash inflows and outflows arising from the company’s core activities, such as revenue from sales of goods or services, cost of sales, depreciation, rent, wages, and taxes.

2. Cash Flow from Investing Activities (CFI)

This refers to the cash flow generated from various investment activities, including the acquisition and disposal of long-term assets such as machinery, equipment, land, buildings, or investments in securities or other businesses.

3. Cash Flow from Financing Activities (CFF)

This refers to the cash flow resulting from obtaining external financing or using internal funds, such as borrowing from financial institutions, repurchasing shares, or paying dividends.

Summary of the Cash Flow Statement Equation

The cash flow statement equation is a formula that shows the relationship between cash and cash equivalents from the beginning of the period to the end of the period. The cash flow statement equation can be written as follows:

Beginning Cash = Ending Cash + Cash Flow from Operating Activities (CFO) + Cash Flow from Investing Activities (CFI) + Cash Flow from Financing Activities (CFF)

How to read a cash flow statement in an easy-to-understand way ? 

When opening the cash flow statement, you should start by looking at the overall "net cash" increase or decrease from the three activities mentioned above, observing that...

• Does the business generate cash flow from its core activities?
• Are the investment activities proactive (acquiring more assets) or reactive (selling assets)?
  Does the business rely on borrowing, and is it at a safe level? 

In the case that it is found that...

• Cash flow from operating activities: Positive
• Cash flow from investing activities: Negative (due to investment purchases)
• Cash flow from financing activities: Negative or balanced

ถ้าIf all three activities above are in alignment, it is considered a healthy cash flow structure. This reflects that the business can generate income on its own, operates prudently, is capable of generating profit, and effectively uses funds to develop and expand its operations. 

What should a good cash flow statement look like? 

A good cash flow statement depends on the nature of the business and the purpose of the statement’s readers. However, a good cash flow statement should have the following characteristics: 

1. Has positive net cash flow, reflecting the business’s ability from operations and investments, showing profitability and the ability to repay debt. 

2. Has positive cash flow from operating activities, indicating that the business is capable of generating revenue and cash flow from its core operations, which positively impacts the company’s liquidity.

3. Cash flow from investing activities aligns with the company’s investment plans.

4. Cash flow from financing activities aligns with the company’s financial plans. 

How does the cash flow statement assist in business decision-making?

1. It is used to assess the company’s liquidity,
   helping business owners know whether there is enough cash to cover monthly expenses.
2. To plan for borrowing or business expansion
   if the business lacks sufficient cash, it may need to seek additional loans or improve cost management.
3. Set credit policies with customers
   if cash inflows are slow, consider offering discounts to customers who pay early or adjust credit terms.
4. Plan dividend payments
   if profits are high but cash is insufficient, dividend payments may need to be postponed.

Expert advice and tips for entrepreneurs:

• Review the cash flow statement every quarter—not just the profit and loss statement—to understand the current financial status, structure, and capabilities.
• Use this information as a tool for financial planning, such as planning purchases, hiring employees, or making additional investments.
• If you need accuracy, speed, and expert corporate accounting services, you can contact professionals for consulting. 

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