Let’s take a closer look at the cash flow statement. So, what makes a good cash flow statement? The cash flow statement can have a total of 8 different outcomes.
From plus to plus, plus to minus, and minus to minus, we can think of a total of 8 different outcomes. So, let’s start with operating activities. Generally, a positive cash flow from operating activities is good. Therefore, items 1 through 4 on the cash flow statement would be considered positive. However, there’s an exception. What about startups? In reality, it’s not easy for startups to generate cash from operations. We’ll come back to this case a bit later.
Next, what about investing activities? In the case of investing activities, it's generally not always good to have a positive cash flow. Of course, if a company is doing very well with investments and consistently making money, that might be a different story, but generally, cash flow from investing activities is negative. In fact, companies with negative investing cash flow are often those with promising futures. Therefore, while it can’t be definitively stated, personally, I find companies with negative long-term investing cash flow to be more attractive.
Finally, what about financing activities? Is a positive cash flow good, or a negative one? It's really ambiguous, right? If the company is making a lot of money from operations and using financing activities to manage its finances, then that can be considered good. Similarly, if the company is raising money through financing activities for additional investments, that can also be a good sign. Therefore, the cash flow from financing activities needs to be analyzed in more detail to assess whether it’s good or bad.
Anyway, based on this, the combinations that can be considered good are definitely cases 3 and 4. In case 4, the company is making a lot of money from operations, using it for investment activities, and also utilizing it for financing activities. This tends to be the case for mature companies. They make enough money, but there isn’t much need for further investment, so this pattern emerges. Recent examples of companies like Apple, McDonald's, and Exxon Mobil would fall into this category.
On the other hand, case 3 would be the situation where a company needs to invest a lot, and the money earned from operations is not enough, so additional financing activities are required. This would be the case for companies that have relatively stable operations but still need to invest heavily. Companies like Toyota and Shake Shack are showing this pattern recently.
Finally, the case we want to look at is case 7. This would be the typical situation for startups. They are not yet in a position to make money from operations, but there is still a huge need for investment. So, how do they cover those costs? They continuously have to raise cash through financing activities. This is why fundraising is a matter of life and death for startups, and terms like Series A, B, C, IPO, preferred stock, RCPS, stock options, etc., all come into play. Anyway, even though they are not making money from operations, case 7 represents the situation where there is hope for the future.
So, overall, when a company grows, it typically starts with case 7, then over time it transitions to case 3, and eventually, it becomes case 4. Of course, this is a theoretical explanation for your understanding, and in reality, it can vary a lot. So, we’ve briefly studied the basics of the cash flow statement. We’ll go into more detail later, but I hope that understanding this much is already helpful. Just remember: the cash flow statement is a performance report that records the company’s results based on cash.
