Cash Flow statement Explained with Just Dial Limited.

This blog addresses the importance of Cash Flow Statement and how the company is performing, keeping in mind the different heads of a Cash Flow Statement.

What is cash flow statement

Cash flow statement is one of the three financial statements complimenting the other two, Balance Sheet and Income Statement. It records the inflow and outflow of cash and its equivalent entering and leaving the business. It shows where the money is coming in and where the company is spending it. Like income statement, cash flow statement also shows the financial information over a particular period. There are three sources of cash flow; Cash flow from operating activity, Cash flow from investing activity and cash flow from financing activity. All three activity has both positive and negative flow of cash.

Cash and cash equivalents: - For most industry, assets that can convert into cash within three month time are considered as the equivalent of cash. Example of cash and cash equivalent is marketable securities like treasury bills, commercial paper, money in a savings account etc.

Note: - It does not include inventory because of less surety about the timing of sales and price.

Is it important or just an over-hyped piece of informant? can you afford to skip the cash flow statement? Let us take an example to understand and analyse its importance in a business.

There would have been no need to prepare a cash flow statement if the transactions occurring in a business are all cash.  But because of credit sales and purchase on credit, it is difficult to see the actual cash flows from Income statement alone because the accounting is done on Accrual basis and not on a cash basis. But what does that mean?

The accrual method of accounting records the revenues when it is earned and not when the business receives actual cash. And it is similar for expenses they are also recorded when they are incurred and not at the time of actual payment.

What difference does that make?

Let us take an example and see what will be the actual effect?

• Sale of goods in cash worth 200
  
• Sale of goods on credit worth 500
  
• Expense paid in cash 300

In this example, though the company is showing the net income of 400 on the income statement, the actual cash flows at the end of the current period are minus (100). This difference is occurred because of the accrual method of accounting.

As the above example explains why it is essential to analyse the cash flow. and, that you should not that skip it as cash is the backbone of any business. Some other important points of the cash flow statement are:

• It tells you if the company have enough cash to pay its expenses to avoid insolvency.
  
• It helps to keep control of the cash in the business.
  
• It helps to determine future cash flow.
  

Cash flow statement: A case study

Let us take an example of “Just dial limited” which is an online platform that provides one – stop solution all the local services needed, to get a better insight on cash flow statement

Back-pedal the cash flow from other activities - The next step is to reverse the transactions from other activities as they are part of net income but not cash flow from operating activities.

Finance Income - This is a part of investing activity as we can see that the gain is because of the sale of mutual fund and change in fair value of other financial instruments. But as it is not a part of OCF we need to subtract 11,416.

Interest income - This is the interest earned on investments and is not an operating income. so we will subtract 2,276 from our OCF.

Adjustment for changes in working capital - Working capital is the capital required to run the daily operations of a business and therefore, it is a part of OCF.

The decrease in other assets - If the assets have decreased, it means cash has collected in exchange for these assets so, we add 1,517 in our OCF.

Decrease in trade payables - It is a part of current liability and, if the payable amount has decreased, this means there must be an outflow of cash, so 429 are subtracted from OCF.

Net cash flow from operating activities - It is the final item which sums up the OCF of business here we can see that it is 15,294 for the current year. It is positive cash flow but almost half in comparison to the previous year and that is not a good sign for the company.

Cash flow from investing activities - The second heading shows the flow of cash related to investments in PP&E, Intangible assets, marketable security and merger and acquisition of other businesses. The investment will result in negative cash flows as they require cash, but, they are also the drivers of growth. i.e. purchase of machinery will result in more production and therefore increasing the growth of the company. And if a company sell these assets then it will show a positive cash flow because the company will earn cash in exchange for these assets.

Purchase of investments - Purchase of investments shows a negative cash flow of 65,166 as cash is required to buy these investments. It is more than the previous year; this means the company is willing to invest in order to generate more income.

Sale/redemption of investments - It has resulted in a positive cash flow of 5,421 as giving up your investments will give you cash in return.

Net cash flow from investing activities: - This is the final output from investing activities, here we can see that the company has a negative cash flow which is largely due to the purchase of investments. The negative cash flow is not something which we need to worry about as this kind of expenditure have future economic inflows and they also drive the growth of the company.

Cash flow from financing activities - A company can finance its resources by both equity and debt. and the flow of cash related to these two activities are included in CFF like, issue of debt, issue of equity, the redemption of debt, buy-back of equity and also the payment of dividends to the shareholders.

Repayment of borrowing - If a company take a loan to from a bank to invest in the business, then it has to repay it at some point. Here, the company repaid the borrowings of 420 which resulted in an outflow of cash this does not account for the interest repayment as we have a separate head for that.

Payment of lease liability - Instead of buying an asset, a company can take it on lease. But same as other borrowings the company needs to repay it. in just dial’s case, we can see that they have made a repayment of lease liability of 2,605.

Net cash flow from financing activities - We can see a sharp drop in the current year as compared to the previous year as there the major chunk was of buy-back of equity shares. And in the current year, we have repayment of the lease liability.

Net cash flow all activities combined - When combining cash flows from all three activities. the result is minus 96. Though it is in negative, it is far better than the previous year. (96)

Cash and cash equivalent at the beginning - The closing cash balance of the previous year stated down here. it is same to same. 4,059

Cash and cash equivalent at the end - This comes from combined net cash flow minus cash at the beginning = 3,963 that will be the cash and cash equivalent at the starting for the next year.