14.4. Digging into Cash Flow Information

Chapter 6 explains the statement of cash flows included in a business's external financial report. Cash flows are divided into three types:

  • Cash flows from operating activities ("operating" refers to making sales and incurring expenses in the process of earning profit)

  • Cash flows from investing activities (outlays for new long-term assets and proceeds from disposals of these assets)

  • Cash flows from financing activities (borrowing and repaying debt; raising capital from and returning capital to owners; and cash distributions from profit to owners)

14.4.1. Distinguishing investing and financing cash flows from operating cash flows


Investing and financing decisions are the heart of business financial management. Every business must secure and invest capital. No capital, no business — it's as simple as that. Inadequate capital clamps limits on the growth potential of a business. In larger businesses, the financing and investing activities are the domain of the chief financial officer (CFO), who works with other high-level executives in setting the financial strategies and policies of the business.

The field of financial management — raising capital for a business and deploying its capital — is beyond the scope of this book. For more information, you can refer to the book I coauthored with my son, Small Business Financial Management Kit For Dummies (Wiley).

This section concentrates on cash flow from operating activities. These cash flows ...

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