Cash Flow Statements Are Not Easy But Necessary

The function of the statement of cash flows is to study all major cash receipts (inflows) and cash payments (outflows) during a period. This includes individually identifying the cash flows incidental to to operating, investing, and financing activities. The statement of cash flows does more than simple report changes in cash. It is the careful disclosure of individual cash flows that makes this statement usable to users. Information in this statement helps users answer questions such as these:
How does a company receive its cash?
Where does a company spend its cash?
What explains the change in the cash balance?
Information around cash flows and its sources and uses can influence decision makers in all-important ways. For instance, we look more favorably at a company that is financing its expenditures with cash from operations than one that does it by selling its assets. Information about cash flows also helps users decide whether a company has enough cash to pay its existing debs as they mature. It is also relied upon to measure a company's ability to meet unanticipated obligations and pursue unexpected opportunities. External information users particularly want to assess a company's inability to take advantage of new business opportunities. Internal users such as managers use cash flow information to plan day-to-day operating activities and make long-term investment calculations.
Macy's dramatic turnaround is an example of how careful analysis and management of cash flows can lead to improved financial stability. A a couple of years ago, Macy's obtained temporary protection from bankruptcy, at which time it urgently needed to improve its cash flows. It did so by engaging in aggressive cost cutting measures. As a result of this endeavor, Macy's annual cash inflow rose to $210 million up from a negative cash flow of $38.9 million in the prior year. Macy's in time met its financial obligations and then successfully merged with Federated Department Stores.
The case of W.T. Grant Co is a classic example of the importance of cash flow information in predicting a company's future performance and financial durability. Grant reported net income of more than $40 million per year for three consecutive years. At that same time, it was having an alarming decrease in cash provided by operations. For instance, net cash outflow was more than $90 million by the last of that three-year period. Grant soon went bankrupt. Users who relied entirely on Grant's income numbers were unpleasantly stunned. This reminds us that cash flows as well as income statement and balance sheet knowledge are critical in making business decisions.

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