Lesson 2 of 5 · 14 min
Common-size cash flow statements
Common-sizing turns cash flow amounts into percentages, either of total inflows and outflows or of net revenue, so trends and comparisons jump out and forecasts become easier.
In short
- Income statement items are common-sized by net revenue and balance sheet items by total assets; the cash flow statement has two approaches.
- Total inflows/outflows approach: each inflow as a % of total cash inflows, each outflow as a % of total cash outflows.
- Under the direct method, each operating receipt and payment gets its own percentage; under the indirect method, only net CFO appears, as a % of inflows if positive or of outflows if negative.
- Net revenue approach: every line as a % of net revenue. It is especially useful for forecasting: forecast revenue, then apply the percentages.
- Typical reads: capex vs depreciation (replacing or expanding?), CFO % of revenue vs net profit margin, and how operating cash is used.
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