- The statement of cash flows or cash flow statement
is the report of the amount of cash collected and cash paid.
The structure of the statement of cash flows
is to separate the cash flows into three categories.
Operating activities are the things
that you do every single day, your operations.
For example, Walmart collects cash
from its operating activities
when it collects cash from selling items to you and me.
Examples of cash outflows from operating activities
are cash paid for wages, for utilities,
for taxes, and for interest.
The next category is investing activities.
Here, the word investing means investing
in the productive capacity of the business.
So cash outflows from investing activities
are buying new buildings, buying new land,
buying new machines.
The third category of cash flows is financing activities.
Financing activities are just what they sound like,
borrowing money and getting new investment cash from owners.
Common cash outflows from financing activities
are the repayment of loans
and the payment of dividends to owners.
Here's the cash flow statement for Walmart
for the year ended January 31, 2019.
When you look at a cash flow statement,
the first number you should look at
is cash from operating activities.
Walmart's cash from operating activities
for the year ended January 31, 2019 is almost $28 billion.
That means that Walmart's day-to-day operations
during this year generated a surplus cash of $28 billion.
If the operating cash flow number is negative,
that means that daily operations are actually burning cash.
Often, a startup company is paying for all of expenses,
but hasn't yet quite got its customers to start paying.
But negative operating cash flow is not sustainable
in the long term.
The computation of operating cash flow starts
with net income
and then includes the effect of events
that cause a difference between net income
and operating cash flow.
For example, the depreciation expense amount subtracted
in computing net income
is added back when reporting operating cash flow
because depreciation is a non-cash expense.
During the year ended January 31, 2019,
Walmart paid an additional $1.311 billion to its suppliers
in order to increase its supply of inventory.
That additional $1.311 billion is shown
as an operating cash outflow.
The computation and reporting of operating cash flow
is a fascinating topic all by itself.
We have an entire course in the LinkedIn Library titled
Running a Profitable Business: Understanding Cash Flow.
All right, what are you going to use
this positive operating cash flow for, this $28 billion?
Well, the first thing you'll want to do
is to buy some new stuff
to enhance the productive capacity of your business.
Maybe you've got to replace some buildings or some trucks.
In the year ended January 31, 2019,
Walmart spent $10 billion for new property and equipment,
along with another $14 billion to buy other businesses.
Let's compare the amount of cash Walmart generated
from their operating activities
to the amount of cash needed for its investing activities.
Walmart generated $28 billion from operations
and used $24 billion for investing activities.
The surplus is about $4 billion.
This is called being a cash cow.
A cash cow is a company that generates so much cash
from its day-to-day operating activities,
that it can pay for all its new buildings, land,
and trucks in cash and still have cash left over.
The final section in the statement of cash flows
is the financing activities.
Here you see that Walmart received about $12 billion in cash
from some new long-term loans,
probably in connection with the business acquisitions
mentioned in investing activities.
Walmart also paid $6.5 billion in dividends.
Walmart generated so much operating cash during the year
that the company actually used $7 billion
of surplus company cash
to buy back shares of stock from its own shareholders.
Remember that the key number
in the statement of cash flows
is cash from operating activities,
almost $28 billion for Walmart.
If a company is generating positive cash
from their operating activities, that's a good sign.
If that number is negative, there are some problems.
Walmart doesn't have any cash flow problems.