Cash Flow Diagrams

A cash flow diagram is a pictorial representation of all cash inflows and outflows along a time

line. The time line is the horizontal scale, which is divided into time periods, usually in years.

Cash inflows and cash outflows are then located on the time-line in adherence to problem

specifications by drawing vertical lines above the axis and below the axis respectively.

A cash flow statement is not only concerned with the amount of the cash flows but also the

timing of the flows. Many cash flows are constructed with multiple time periods. For example, it

may list monthly cash inflows and outflows over a year’s time. It not only projects the cash

balance remaining at the end of the year but also the cash balance for each month.

Working capital is an important part of a cash flow analysis. It is defined as the amount of

money needed to facilitate business operations and transactions, and is calculated as current

assets (cash or near cash assets) less current liabilities (liabilities due during the upcoming

accounting period). Computing the amount of working capital gives you a quick analysis of the

liquidity of the business over the future accounting period. If working capital appears to be

sufficient, developing a cash flow budget may be not critical. But if working capital appears to

be insufficient, a cash flow budget may highlight liquidity problems that may occur during the

coming year.

In a nutshell, the cash flow statement is made up of 3 categories, namely operating activities,

investing activities and financing activities.

Operating activities – These are revenue generating activities of the company, which normally

includes cash receipts from sale of goods and services, cash payments to suppliers for goods and

services and disposal gains and losses of fixed assets.

Investing activities – These are activities that involve the acquisition and selling of fixed assets

(long termed assets like land, building or plant), cash receipts from the disposal of fixed assets

and cash payments to acquire fixed assets.

Financing activities – These are activities, which change or impact the size and the composition

of owners’ capital. They include cash proceeds from issuing shares, or debt and payment of

dividends.

The importance of cash flow statement lies in the fact that it explains the changes in cash and

gives insight to the company’s operating, investing and financial activities. Also, cash flow

statement will unveil the company’s ability to generate cash to meet its short-term obligations,

thereby assessing if company’s liquidity and solvency position is sound.

Cash Flow Diagram

upward arrows - positive cash flow (receiving the loan)

downward arrows - negative cash flow (pay off)

A cash flow statement is not only concerned with the amount of the cash flows but also the

timing of the flows. Many cash flows are constructed with multiple time periods. For example, it

may list monthly cash inflows and outflows over a year’s time. It not only projects the cash

balance remaining at the end of the year but also the cash balance for each month.