My column in today’s Keys Weekly.

Q. What should I know about a company’s cash flows?

A. The third financial statement that stock investors should become familiar with is the statement of cash flows. Inflows and outflows of cash are the heartbeat of any business, and investors, like company managers and lenders, should examine them closely.

The statement of cash flows is critical because an income statement does not give a complete picture of the company’s most important resource – cash. That is because of differences in timing between accounting transactions and related cash collections or payments. For instance, a company might ship a product and record revenue in March, but not receive a cash payment for it until May. Because of various “noncash” items, income statements don’t tell the whole story.

The statement of cash flows tracks cash across three areas of the business – operations, investing and financing. The most important section to focus on is “cash flow from operations,” which tells you what cash is provided by normal business operations and how much cash is used by the business. Consistently positive cash flow from operations is a sign of a healthy business. Negative operating cash flow, however, means a business is bleeding cash and will eventually need to either borrow money or sell shares simply to stay afloat. Neither are a good sign.

In contrast, a negative number in the “cash from investing activities” section is fairly common and for most growing companies, it is generally okay. Growing companies need to invest more in physical equipment to sustain their growth. The figures in the “cash from financing activities” section usually oscillate between negative and positive. Consistent cash flows from financing activities, however, indicate the company is depending excessively on the stock and bond markets to run its business.

At this point, let’s step back a bit. As you can probably tell by now, there are plenty of ways companies can play games with their own financial statements. The statement of cash flows is one place to catch them. Next week I’ll give you some other places to quickly check for accounting shenanigans prior to investing.