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The Importance of a Cash Flow Statement for Businesses: Why It Matters

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A cash flow statement is a key component of any business plan and is one of the most important financial documents a business can have. It is a detailed record of how much money is coming in and out of the business that serves as a guide to ensure a stable financial position. A cash flow statement provides an accurate picture of the overall business’s financial health, thus helping informed decision-making, planning for future growth, and identifying potential problems. Based on the data of a cash flow statement, a business owner can decide on how best to manage their finances and ensure the long-term success of their business.

What is a cash flow statement?

A cash flow statement is a financial document that tracks the amount of all company’s cash inflows and outflows over a specific period, typically a month or a year. In other words, it breaks down business revenue and expenses, displaying how much a business earns from its various activities (such as operation, investment, or financing) and spends on fulfilling its financial obligations. 

It is important to note that a cash flow statement does not track assets and liabilities as a balance sheet does. It shows the difference between the amount of money entering and leaving the business over a given period, based on which a business owner can understand how well they are handling their cash flow, forecast their ability to go without additional funding, and plan for future growth.

Why is a cash flow statement important?

A cash flow statement is one of the three must-have financial documents for any business to analyze regularly. Its primary purpose is to provide an accurate record of all the cash a company receives and spends during a control period, providing a clear picture of the financial performance. Knowing how to read it, a business owner can have valuable insights from a cash flow statement. Here’s an overview of some of the significant benefits a cash flow statement can offer a business owner.

An overview of the efficiency of managing resources

The cash flow statement can show if the business is generating enough cash to cover its expenses and liabilities. And whether there’s a capacity to invest in growth opportunities. 

The ability to measure financial performance

The cash flow statement also provides key metrics that help measure financial performance, such as net cash flow, giving an instant answer to how well a business is doing or whether additional financing will be needed to keep on track, etc.

A breakdown of the cash sources

The cash flow statement provides information on the sources and uses of cash, including cash from operations, investing activities, and financing activities. By examining the cash flow statement, business owners drill into how they use their cash, which activities provide the most cash, etc. This way, business owners can identify and prioritize those that generate more cash and cut on those that cause cash leakage. 

An early issues detection

Another benefit of understanding the cash flow statement is that it can help identify potential cash flow problems before they become serious. Going through the cash flow statement regularly, business owners can spot certain trends (that can indicate potential issues), such as a decline in cash from operations or an increase in cash from financing activities, on time and come up with a solution. 

Efficient planning of resources distribution

The cash flow statement can also help business owners to plan their cash flow more effectively. The analysis of the current cash flow situation and historical trends can help business owners estimate their future cash needs and plan accordingly. This way, they can avoid cash flow problems in the future and ensure that their business is well funded.

Efficient benchmarking

Finally, the cash flow statement helps compare a business’s performance against similar businesses in the industry. It can enable business owners to identify areas where they can improve their financial performance and become more competitive in their industry. 

How to create an accurate cash flow statement

Generating a cash flow statement is an important part of a healthy financial system enabling business people to understand the sources and uses of their funds. 

There are several ways to generate cash flow statements. 

Those who do their bookkeeping in Excel can calculate the cash flow statements each month based on the information on their income statements and balance sheets. 

Another way is to use accounting software. It can create cash flow statements based on the information already entered in the general ledger. It dramatically facilitates the creation of cash flow statements and increases their accuracy, eliminating the need to input the same data several times, which can be error-prone. Using software can also help set the process on autopilot and generate cash flow statements each month automatically.

Whichever you choose, it’s highly recommended to turn to a professional accountant to help you generate and analyze your cash flow statements if you want to make the most of them.

What to know more? Learn about Cash Flow Analysis!

Conclusion

A cash flow statement is one of those business tools that help evaluate financial performance and predict the further movement of a business. It’s a detailed financial document that tracks the amount of money coming into and going out of a business over a given period, giving insights into how well a company can sustain itself and have enough funds to pay off any debt. A cash flow statement can be helpful for businesses at all stages and of all sizes.

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