However, if a negative cash flow from operating activities is a surprise to managers and owners, it may be undesirable
Raising Capital in a Direct Public Offering
A few periods of negative cash from operating activities is not by itself a reason for alarm if it is based on plans for company growth or due to a planned increase in receivables or inventories. Over time, if uncorrected, it can foretell business failure. Managers and owners should pay particular attention to increases in accounts receivable. The cash flow statement gives the true picture of the account. A large increase in accounts receivables may warrant new billing or collection procedures.
The cash flow statement puts investing activities into perspective. At one glance, you can see whether or not a surplus in operations is being used to "grow" the company. A lack of investing activities, that is few purchases of new equipment or other assets, may indicate stagnant growth or a diversion of funds away from the company.
The financing activities section of the cash flow statement will show repayments of debt, borrowing of funds, as well as injections of capital and the payment of dividends. As a company expands, this area of the cash flow statement will become increasingly important. It will tell outsiders how the company has grown and the financial strategies of management.
Together, the three sections of the cash flow statement show the net change in cash during the period being examined. A comparison between past periods will give owners and managers a good idea of the trend of their business. Positive trends in cash flow may encourage owners to consider long-term financing as an aid to growth and increase their comfort level concerning the company's ability to generate cash for repayment. Strong cash flow will also make it easier to acquire financing and to negotiate with lenders from a position of strength. Preparation of a cash flow statement is the first step toward financial management for long-term success.