A cash flow statement is a financial statement prepared as a GAAP or regulatory requirement. However, the management needs to perform a ratio analysis of the cash flow statement to compare cash profits, and cash generated from operations. It highlights how the money is getting used with its immediate peers/competitors.
At times, management benchmarks its cash flow statement with that of its peers. However, absolute comparison isn’t possible. The peers/competitors operate at different sizes of revenues and operations etc.
How to benchmark a cash flow statement?
For financial statements, Benchmarking is comparing the organisation’s financial statements with its peers to compare the Company’s performance. It aims to identify opportunities for improvement. In benchmarking a cash flow statement, management uses ratios with common denominator. We use ratios instead of absolute because the peers/competitors generally operate at different level of operations. For example, during the year ended December 31, 2020, ABC, Inc. generates ~$1 Billion net revenue and its closest peer XYZ, Inc. established 5 years before ABC, Inc. generates ~$14 Billion net revenue. Therefore, the absolute numbers of the cash flow statement are uncomparable because the revenue base is different and so would be the net profits.
In the cash flow statements, these KPIs are “Ratios” – the metric to gauge and compare money generated from or used in operations, investing and financing.
Cashflow Statement Analysis Ratios
