Financial cash flow equals the change in liabilities (excluding retained earnings) less the change in loans and investments and other non-cash and equivalent current assets.īalance sheet cash flow subtracts the financial cash flow from operating cash flow. The purpose of operating cash flow is to determine the ability to finance internally the change in growth producing assets.įinancial cash flow isolates the sources and uses of funds, other than the changes in retained earnings, growth producing assets and cash and equivalents. Operating cash flow equals changes in retained earnings adjusted for changes in goodwill minus the quarterly changes in growth producing assets (property, equipment, other long term assets and other real estate owned). Operating cash flow for a financial institution measures the liquidity demand from growth. The end result is balance sheet cash flow, which equals operating cash flow less financial cash flow.
Balance sheet cash flow separates cash and equivalents (cash and balances due from depository institutions) from investments and loans when computing financial cash flow. Cash-flow is the oil which drives a bank’s engine and helps us determine if the motor running a bank is sufficiently “lubricated” or not.īalance sheet cash flow measures the profit return on physical assets in computing operating cash flow. Cash flow analysis often provides advance notice that a bank may be facing financial trouble even though earnings are still looking strong. Cash flow can reveal whether the bank is generating or consuming cash in its normal operation, if it is investing for the future, and whether it is rewarding investors with dividends or seeking additional capital from the equity or debt markets. Cash levels help reveal the financial strength and resources of a bank, while cash flow indicates the generation of new cash. While earnings and capital are still the primary metric used to judge bank performance and measure the attractiveness of a bank’s stock price, a growing wave of investors focus on cash. Balance Sheet Cash Flow: A Guide to Liquidity
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