Page 5 – Wise Investor Path

Cash flow statement in layman terms is a statement of a company’s cash flow in a particular period. The word cash flow refers to the flow of cash into or out of the business. In simple words if flow of cash is more in to the business we can conclude that the business is financially doing well. Cash flow in to or out of a business is created basically by three mechanisms which are operations, investing and financial activities. Understanding cash flow statement is important in order to estimate liquidity, solvency of business and financial flexibility.

Financial statements provide complete information about a company’s finances. Balance sheet provides information about what a company owns and what a company owes. Income statement shows how much money has been made and how much has been spent. The cash flow statement connects the strings by actually tracking how much cash has entered and how much has left in a specific period of time.

An ideal approach to understand critical aspects of the cash flow statement would be to understand its components, analysis and impact on decision-making. We will cover each aspect in detail which enable you to conceptually understand the cash flow statement.

Key Components of the Cash Flow Statement

Cash flow statement is divided mainly in to three sections which are actually the modes in which a business can generate cash which are operating activities, investing activities and financing activities. We will cover each section starting with the operating activities.

Operating Activities

In layman terms cash flow for operating activities provides the information about where the cash is coming from and where it is going. From this part of the cash flow statement information about efficiency in utilizing the capital for business operations can be estimated.

Cash Inflows: Cash inflow obtained from selling goods and services, recurring amount from royalties, fee charged for services, commissions in sales or products and other cash flows which are basically obtained from business operations are included in the cash inflow due to operating activities.
Cash Outflows: The outward flow of cash for suppliers, business operating expenses, salary for employees, interest payments on debt, income tax etc. are included cash outflows for operating activities.
Net Cash Provided by Operating Activities: Net cash provided by operating activities can be calculated by difference of cash inflows and cash outflows related to core business operations. However, the most widely method is to add net income from the Income statement, adjustments in the working capital and non-cash items like depreciation.

Net cash provided = Net Income + Adjustment in working capital + non-cash items

Investing Activities

Cash flow from Investing activities simply refers to the cash flow resulting from buying or selling assets. Buying and selling of assets can provide a lot of information about how a business plans to expand or grow in future.

Cash Inflows: Inward cash flow from sale of property, plant, and equipment, sale of investments is considered positive cash flow or cash inflow from investing. Selling assets creates positive cash flow for investing activities.
Cash Outflows: Cash flow outward for purchasing assets like property, land, equipment, investments, and loans given to others is included in the cash outflow. Buying assets creates a negative cash flow for investing activities.
Net Cash Used in Investing Activities: Net cash used in investing activities is simply the difference between cash outflow and cash inflow related to acquiring or diluting any kind of asset or investment which will give returns in future. It is really helpful in estimating a company’s future moves regarding expansion and financial health. If a company’s net cash used in investing activities is negative it means that the company is investing in creating assets and if the value is positive this means that the company is selling or capitalizing on investments for strategic reasons.

Financing Activities

Cash inflow and outflow refers to the flow of cash into or out of the organisation from financial activities which include issuing equity, borrowing funds, repayments of burrowed funds, paying dividends to shareholders or repurchasing the company shares.

Net cash used in financial activities is also just the difference between the cash inflow and cash outflow due to the company’s financial activities related to the business operations and expansion.

Net Increase (Decrease) in Cash and Cash Equivalents

Net increase or decrease in cash and cash equivalents is defined as the total cash used operating activities, investing activities, and financing activities which describes a company’s overall position regarding cash for the period for which the statement is being prepared. Cash and Cash Equivalents at the Beginning and End of the Period

Cash equivalents in layman terms refer to assets that are equivalent to cash at hand. These are assets which can be converted into cash within a time period of 90 days. These include any asset that can be liquified into cash within 90 days.

Importance of the Cash Flow Statement

Liquidity Assessment

In simpler terms cash flow statement provides a complete view regarding a company’s cash flow which is directly correlated to a company’s ability of maintaining liquidity and meeting short-term obligations.

Financial Health

Cash movement is an extremely important parameter for estimating a company’s financial health. This parameter is an exclusive feature of cash flow statement and is not provided by the Balance sheet and Income statement.

Investment Decisions

Cash flow statement is the statement to which investors and financial analyst usually refer in order to evaluate a company’s financial stability and potential for growth in future to make investment decisions.

Operational Efficiency

Net cash flow from operating activities is used in evaluating the operational efficiency of a business and cash flow statement is used for this purpose. It is analysed and reviewed frequently by management and stakeholders.

Analyzing the Cash Flow Statement

Cash Flow from Operating Activities

If your company is doing well in operations and is generating cash while satisfying its short-term obligations this means that you are effectively using the working capital and your cash flow is positive.

Cash Flow from Investing Activities

Negative value of cash flow from investing activities indicates that a company is investing in creating assets to plan for the future but excessive cash outflow can impact the current liquidity of a company.

Positive cash flow from investing activities indicates that a company is actually selling assets to create cash flow and hence is a concern as any company would sell assets to maintain operations when it is not generating cash from business operations.

Cash Flow from Financing Activities

If a company is taking debt from the market or is providing equity to raise money to either finance its operations or expand its presence cash is actually coming into the company and hence cash flow would be positive.

Negative Cash Flow: Could suggest that the company is repaying debt, paying dividends, or repurchasing shares, which might impact its liquidity.

Cash goes out of the company when it is repaying creditors, paying dividends to shareholders, or purchasing its shares from the shareholders, hence the cash flow would be negative. Reducing debt improves financial health but excessive cash outflow can impact liquidity.

Free Cash Flow (FCF)

Free cash flow can be understood as the cash flow available to repay debt, pay dividends, and invest in growth opportunities after taking care of expenses. It is cash flow from operating activities minus the capital expenditures. A positive free cash flow reflects that your business is financially flexible however a negative free cash flow that you are either struggling to make ends meet or are just able to make ends meet in your business.

Cash flow statement is an amazing tool to evaluate operating efficiency, capital management and financial health of a business. Cash flow statement not only helps in tracking the cash flows but also helps in making strategic adjustments to ensure stability and solvency of any business. Analysing cash flow statement is must have skill whether you are an investor, analyst or a business owner.

Businesses are run in order to make profit and income statements provide a comprehensive insight about the profitability by focusing on revenue, expenses, gains and losses for a specific period. Analysing Income statement for a specific period can provide information about the efficiency of business operations, management, underperforming areas of business and business position with respect to its competitors. Income statement is also known as Profit and loss statement. Understanding what income statement is, how it is made, what impact it has on business can help in strategizing operations and increase profitability.

Key Components of the Income Statement

1. Revenue (Sales)

Gross Revenue: Gross revenue is the total money a company has made in a particular period before subtracting expenses by providing goods and services to the customers and clients.
Net Revenue: Net revenue is gross revenue minus the returns, refunds and discounts. It is what a company has actually made.

2. Cost of Goods Sold (COGS)

Cost of goods sold (COGS) is the net cost associated with producing goods or delivering services like raw materials, labour costs, manufacturing overheads, service management costs etc.

The formula for COGS is:

COGS = Starting Inventory + Purchases – Ending Inventory

3. Gross Profit

Gross profit in layman terms represents the net profit and is an indicator of efficiency of a company’s production and sales. It is calculated as a difference between cost of goods sold (COGS) and net revenue.

Gross Profit = Net Revenue – COGS

4. Operating Expenses

The expenses in maintain day to day operations is called Operating expenses these expenses include:

Selling, General, and Administrative Expenses (SG&A): These expenses include staff salary, office utilities, rent for office space and marketing expenses.
Depreciation and Amortization: These are the expenses allocated to the non- tangible assets during the time of their use. It is a very important aspect while considering operating expenses as most people miss out on these expenses.

5. Operating Income (EBIT)

Operating Income which is also known as Earnings before interest and taxes (EBIT) is an excellent metric to measure a company’s profitability in its core business operations it is simply the difference between operating expenses and gross profit for a particular period.

Operating Income= Gross Profit – Operating expenses

Non-Operating Items –These include all expenses and revenues which are not linked with to the core business operations such as interest income, debt interest expense, gains or loses from investments not related to the core business.
Pre-Tax Income –
- As the name suggests it is company’s oncome before the taxes are taken out. Mathematically pre-tax income is operating income plus the non -operating items for the business.
- Pre-Tax Income=Operating Income + Non-Operating Items
Income Tax Expense –It is the amount of tax a company pays based on its pre – tax income.

Net Income
- The most important metric to evaluate a company’s financial health is Net Income. In layman language it is a company’s profit or loss after taking out all deductions including expenses and taxes from total revenue.
- Net Income=Pre-Tax Income−Income Tax Expense

Importance of the Income Statement

Performance Evaluation: Evaluating performance of a company means measuring its profitability and operational efficiency. It is very important for the stakeholders and investors to review a company’s performance before making the important decision to invest in the cause and that is where Income statement is really useful as it provides the clear picture about profitability by calculating a company’s net income.
Decision Making: The benefits of precise analysis of income statement are not limited only for the investors to assess risk associated with the investment. Income statements are really useful to decide whether to go for expansion or cost- cutting. If execution of an existing operating strategy is not generating satisfactory results it will be reflected in the income statement and strategic changes can be made accordingly to the operations to generate more satisfactory results.
Financial Planning: Budgets are created by using the forecasted data which is again based on analysing past income statements. The future budget is a reflection of expected future performance which can be efficiently predicted by using income statements. Hence analysing income statement in essential to create an effective budget which aligns with the financial goal of the organisation.
Compliance: It is mandatory for a public company to maintain transparency and compliance with the financial reporting standards. Hence it is an essential requirement for the public companies to file income statements with regulatory bodies.

Analyzing the Income Statement

Trend Analysis: Income statement can be used to analyse trends by doing a comparative analysis over multiple periods find trends in revenue, expenses and profitability to highlight the areas which are showing improvement and to find areas which require improvement.
Ratio Analysis: Income statement is the key source to calculate financial ratios like gross profit margin, operating margin and net profit margin. By getting insights about these important ratios strategic changes can be made to improve efficiency and performance of the business.
Comparative Analysis; Comparing the income statement with the industry competitors enables the business to do efficient and effective benchmarking regarding business performance. Not only in benchmarking income statement also helps in identifying competitive strength and weakness of business as compared to competitors.
Segment Analysis: Income statements when broken down as per the business segments or product lines can reveal which segments or product lines are profitable and which segments or lines require improvement.

Conclusion

Analysing Income statement reveal the complete picture regarding a company’s operations and financial health. It is not important for only for the purpose of improvement in operations but also for the investment purposes. Analysing Income statement is crucial also for doing the fundamental analysis of the company before making the decision to invest in its stock. Therefore, analysing income statement is a must have financial skill for everyone.

Saving money can be tricky these days. There are many day-to-day expenses which might seem insignificant, but can consume a significant amount of your income. The task of mitigating these expenses can seem daunting if you look at these expenses these altogether at once. The small everyday expenses can really dig a big hole your pocket cumulatively and can have adverse impact on your savings, investment plans and future prospects by triggering a cascading effect and by developing unhealthy spending habits.

A little bit of understanding and management of these daily expenses can stop the excess leakage of your money and accelerate your journey towards your goals. Let us address some these one by one and here are some suggestions on how deal with these.

Differentiate between needs and wants!

Thinking and prioritizing your needs can streamline your expenses and reduce the urge to spend that you do not need right now. It does not mean that you have to live the life of a miser, it simply means that you have to prioritize the expenses at every stage of your life put your needs ahead of your desires until you reach a stage where you are financially free to get what you want. In other words, exercise the principle of “forced scarcity”.

Consider creating a Budget

It might sound boring and old school but there is a strong reason why this habit is one of the most common habits of financially independent and successful people. Let us start understanding the importance of the complete by a very simple and effective analogy, consider a simple activity for example vacation we will be discussing importance of planning and budgeting with this activity. The very first thing that you need to decide is where you want to go, followed by the decision how you would be going, then how much time and money you need to get everything sorted and arranged for a vacation. Now in the exact same way anyone can decide what are their financial goals, how much money they can afford to spend each month to achieve their goal in the time which they have fixed to reach that goal. You will notice this little analysis of your present financial status and the status that you want to get will bring a positive change. You will at least start to look for information, the answers how you can do what is required to be done.

Understand money

Again, you all must be wondering we know money is something we get in return for the work we do. Be rest assured this is the middle-class trap that most people will never be able to get out of. Reality of money is completely different than what we know. Have you ever wondered why some people are so good in creating wealth regardless of education and skills they have. Fact is intellect can be a source to create wealth but getting rich and financially free requires the understanding of how money is circulated, how value of certain things increase exponentially, how trends change and are generated in the society about certain products, commodities and services. If you understand these details well congratulations you are ahead in this race. Learning about finance and economy can provide you an extra ordinary advantage in wealth creation.

Let us start with the small changes that you can make in day-to-day routine to wise use your money and increase your savings:

Try home entertainment instead of Date Night or Night Out!

Try to limit the outdoor adventures with your spouse and family and organize home entertainment on weekends, this will cost a fraction of those outdoor adventures and will bring the feeling togetherness as well. You will find that being together at home and enjoying homemade food with a game or a movie on your T.V can be better than that noisy and crowded night out.

Cut outdoor lunches during weekdays!

It might not seem effective at the beginning as you have to put some effort in preparing your lunch but consider a saving of 10 pounds to 20 pounds per day multiplied by your workdays in a month. This will definitely be 30 to 40% of your monthly rent or your mortgage. The satisfaction that you will get by preparing your meals yourself is truly unmatched.

Use carpooling or public transportation to commute to work!

This one habit will some you at least 20 – 30 % of your monthly expenses as we all know prices of gas increasing at a rapid rate and you will also get some time to read or get a power nap during commuting to office. You can also use the time to plan for your workday during travelling.

Organize your grocery shopping!

The main reason to earn is to survive and for that everyone needs food so the this is one expense that you can not eliminate however you can track, optimize and use smart inventory management to not only mitigate the expense but also to keep your self healthy. Looking for “buy one get one free” offers on your grains and greens can not only save the hard-earned money but can also help in storing larger number of essentials each month. You can also track the consumption to plan the quantities that you might need each month for each category of groceries that you buy.

Give yourself a target for saving and investing each month!

This has to be a priority as soon as you receive your pay check each month no matter how small is the amount for each of the category but there has to be an amount that you must allocate towards your saving and investments. Remember consistency is the key here. Once you are disciplined enough in these two departments try to allocate a percentage of your income each month for savings and investments this will give you a financial edge in near future to make decisions that other people would be dreaming about. Remember it has to be you who would take that first step in your journey towards financial freedom. So, “keep calm, keep saving”!

Just like the digital transformations of our day to day lives retail banking domain has also changed drastically in recent years and to be honest this evolution is just speeding up each year. From personal interactions to smart banking solutions retail banking has come along way in recent years. Technology has completely transformed various aspects of retail banking like managing your account, keeping track of transaction, sensing your financial needs and coming up with new offers for them. Every account holder must stay updated with these services to take complete advantage of these technical advancements in retail banking.

The Traditional Banking Era

If you would have to create a picture of a bank in its working hours, how would you visualize it? The very first thing that will come to your mind would be people standing in long queues, then you would picturize separate counters for cash deposits, cash withdrawals and officials dedicated to process loan applications sitting at their desks and helping customers with the information regarding the same. Now this scenario has drastically change by the development of internet banking, mobile banking, artificial intelligence and machine learning. Now, we all have faced issues like long delays, less efficient service, very poor accessibility of the banks at least once a decade ago in our experience with banking services offered the banks.

The Dawn of Digital Banking

First transformation in the retail banking came around with the outburst in the web bubble when banks started online accounts in later half of 20th century. This one development in the technical domain enabled customers to gain insights about their accounts, process their payments, transfer their funds instantaneously from the convenience of their house. This advancement increased consumer experience, cost reduction, efficiency operational and customer reach outside their physical branch network.

The Rise of Mobile Banking

Mobile technology played crucial role and is taking retail banking to new heights in terms of personalized customer experience. This development made on the go banking services possible. Development of mobile applications enabled the customers to make transactions instantly, access information instantly regarding their account, get customized offers as per their financial history and most importantly having access anywhere and anytime.

The Digital Banking Revolution

Dynamically changing customer behaviour, accelerated technological advancements and heightened competition from emerging fintech businesses led to the birth of Digital Banks. These are the banks which can be considered as virtual version of the retail banks which provide complete banking services as provided by the retails but without the need for a physical bank location. These digital banks help banks to cut the cost of operations and provide 24/7 banking services throughout the year. Digital banks provided customized and uninterrupted banking services to the generation of the customers which is more tech savvy and require quick resolution of their banking issues.

The AI Uprising in retail Banking

Artificial Intelligence has transformed operations of every industry today and banking industry is not an exception in this transformation. It has enhanced customer experience, optimized operations and improved risk management drastically. Banking industry has been revolutionized by the intervention of artificial intelligence in major aspects of retail banking.

Enhanced Customer service

Banking services are all about the satisfaction of the customers as it is people’s money which is managed and trust of customers in the services provided a bank is the deciding factor in any bank’s success. AI empowered chat bots and virtual assistants are providing services beyond simply answering customer’s queries. These bots and assistants which are based on machine learning models can not only resolve issues and queries but can efficiently provide recommendations-based customer’s preferences and consumer behaviour patterns. On the server side these machine learning models can effectively anticipate customers needs, predict future financial needs based on data from various sources and customers credit history. New marketing campaigns can be accurately designed to reach out to cater modelled needs of customers.

Accelerated Operations

Fraud Detection and Prevention:

It is just amazing that how AI based models can detect patterns real time that indicate suspicious activities empowering banks to identify and prevent fraud, security threats and money laundering activities much more efficiently than traditional rule-based systems.

Credit Scoring and Underwriting:

When it comes to money decision making for lending is of prime importance for banks. The efficient and accurate models generated by using artificial intelligence can prove a game changer in calculating credit scores to assess credit worthiness of applicants. This accuracy helps in improving decision making for lending processes hence mitigating the risk for defaults and delinquencies.

Process Automation

Iterative banking tasks such as data entry, documents processing and account reconciliation can be automated easily by robotic process automation and integration of artificial intelligence can boost this automation in terms of speed and efficiency. This gives banks an edge in allocating human resources to more value addition activities and hence provides cost saving in operations.

Risk Management and Compliance:

Market Risk Analysis

With the exceptional ability to integrate data from various sources AI driven algorithms can analyse market data along with various present economic indicators to assess market conditions so that the new trends can be identified. The analysis of these trends can help banks in optimizing investment strategies which helps in reducing risks associated with investments.

Regulatory Compliance

Automated compliance monitoring and reporting ensures the compliance with the regulatory requirements for banks. It helps banks to stay compliant with the regulations like anti- money laundering, Know your customer, and data privacy. Being compliant reduces the risk of penalties which is indirect cost saving for the banks.

Cybersecurity

Customer data protection is the utmost priority for the financial institutions and AI powered cyber security solutions can prove excellent as these algorithms can detect and mitigate threats like malwares, phishing attacks, by analysing network traffic, user behaviour and system vulnerabilities in real time which enhances the resilience and integrity of banking systems and data.

Artificial Intelligence has proved nothing less than a boon for various sectors and banking sector is not an exception. Artificial Intelligence has not only increased efficiency and accuracy for the banks but has proved exceptionally beneficial for safeguarding customer data and mitigating financial frauds. It has been successfully able to transform the issue resolution aspect of the banking and financial services. We can hence say that AI revolution has bridged a substantial gap between the banks and their customers and has proved to be asset for the society as well.

Technical innovations have done a complete makeover of the way in which banks work. It is very important for the customers to understand these advanced services so that they can use these technical advancements to the fullest. Online and mobile services provide exceptional level of access, convenience and outstanding capability to manage finances anywhere anytime.

Paradigm shift towards Digital Banking

Banking services domain in United Kingdom has undergone a very rapid evolution in recent times with the onset of digital banking, which has transformed completely the way people handle their finance. Digital banking provides a convenient, innovative and personalized services along with recommended financial solutions. In other words, it is the mode of banking which provides everything that conventional banking provides with 24/7 accessibility and convenience of customers.

Let us see the reasons why the entire world is drifting towards Digital Banking:

Convenience and accessibility:

Just observe the differences between conventional banking and digital banking you will see the reason behind the sudden shift towards digital banking globally. Digital banking provides unmatched convenience to check balances, make payments and transaction from anywhere. Mobile applications provide various services like remote check deposits, bill payments, account management just with a tap on your mobile phones. Opening an account was used to be time consuming task but not anymore. Online account opening services have made the process fast, streamlined and extremely user friendly that too without the need to visit the physical branch of your bank.

Innovation and Personalization:

Digital banks have AI powered chat bots and virtual assistants which can provide individual support, issue resolution, and provide financial advice based on customer behaviour and needs. Data driven insights are used now in order to study spending patterns and financial needs which empower digital banks to provide relevant products and service according to need of the customer. Fin tech innovations are used efficiently by digital banks to cater dynamic customer needs like budgeting applications, investment platforms where everyone can invest and efficient payment systems to make transactions fluent and seamless.

Security Features:

In any financial transaction customer data is a critical information that must be secured in order to detect and prevent any kind of financial fraud. Digital banks use encryption which ensures security of sensitive data like account number, password, and personal details. Access to accounts is secured by multi factor authentication where user is required to answer validate their identification by various forms like passwords, security questions and one- time passwords. Digital banks use various machine learning algorithms to detect suspicious activity like strange account behaviour, unapproved transactions, sudden change and frequent change of personal details and notify the customer before any damage is done to the account.

Account Management:

Digital banks have really transformed account management in aspects of accessibility and response time. We all remember how tiring it used to be to get financial statements from the physical branches of your bank. Now it is just one click in your online account and you can have the access to the information regarding your current balance giving you real time access of your financial status. Checking transactions has become really easy and simple through digital banking as it gives you instant access to detailed transaction history for the time frame you want. Customer can download account statements in an instant. These electronic statements are an excellent way to reduce paper wastage as well.

Fund Transfers:

Digital banks provide efficient platforms to ensure quick fund transfer facility to their customers. By using these online platforms customers can transfer funds instantaneously between their accounts like checking accounts, savings accounts etc. External transfers like peer-to-peer transfers, bill payments and wire transfers have also become fluent with digital banks. Icing on the cake is actually the feature of scheduled transfers as it enables the customers to schedule their payments on the date of their choice ensuring timely payments for their bills.

Customer Support:

Online banking platforms provides a robust customer service structure to cater various requirements of the customers anytime anywhere. Nearly every digital bank provides chat support service to its customers so that they can get their issues resolved by chatting with a live representative through the chat feature of their website or mobile application. Many prestigious banks have integrated artificial intelligence in the chat mode to develop chat bots that categorizes the query and enables accurate and efficient support for the queries.

Digital banks empower their customers through knowledge base in their websites so that the customers can be educated about various services that are provided by the bank. These FAQ sections, tutorials and knowledge base articles help the customers in resolving common queries and information about various aspects of the service provided.

Majority of online banks have dedicated voice and email support for their customers to ensure a 24/7 support for the customers. Banks have dedicated teams to resolve customer queries and issues like account inquiry, technical issues with the applications etc. Customers can get their issues escalated and resolved right away as there is always an executive available to help them.

Tips for Safe and Secure Banking

Even though digital banks and online banking platforms have robust information security structure. There is still some level of awareness of online security which every customer must have to ensure the safety of their banking information.

Use Strong Passwords: Your password is the key to your account information it should be something easy to guess. It is advisable to have a complex and unique password which have numbers, letters and special characters so that it becomes hard to guess. Enabling Multi-factor authentication adds an additional security to the account.
Keep Software Updated: Your accounts information is always at risk from spywares and viruses as they can have in built codes to gather the data from your device. Most people have account information and passwords stored in their devices like their mobile, computers, tablets etc. It is very important to use updated anti-virus software to ensure the information security.
Beware of Phishing Scams: Hackers, scammers or fraudsters use emails, text messages or phone calls where they pretend to be executive and try to create an emergency situation with your account. It is advised by every bank to not share your account information with anyone over the call, text message or email. They usually target the customer of a certain age who are not tech savvy and will ask information to access the account and resolve the issue which is not even there with the account.
Monitor Account Activity: People who are vigilant enough to monitor their accounts regularly and check their transaction history are more likely to find any suspicious activity sooner than people who depend on monthly account statements for the account information. The sooner you find any thing unusual the lesser will be the damage to your account.