When you're trying to learn more about your business finances, a cash flow statement is a must. This financial statement paints a clear picture of how your business is managing its cash to pay debts and fund operations. The cash flow statement can help determine the success of your business and be an important indicator of potential to an investor.
What is a cash flow statement and why is it important?
What is Cash Flow?
Cash flow is the movement of cash or a cash equivalent in and out of an organization during a specified measure of time. Cash could be flowing in from client payments for goods and services. A cash equivalent inflow would be a return on an investment or taking on a loan or other financing to access cash. Expenses, loan and vendor payments are an outflow of cash. When the expenses or payments are more than the influx of cash, the business is said to have a negative cash flow. The reverse is true for a positive cash flow.
What is a Cash Flow Statement?
Also called a statement of cash flows, this report reveals the expected receipt of cash and payments in three activities, operations, investments and financing. If you imagine a cash flow statement like your checking account statement, you'll get a clearer picture of your business' finances. You'll see where you're spending too much money and when it's taking too long to gain access to funds. A profit and loss statement may show that your business is profitable but your cash flow statement could show that you won't have enough money to pay the rent this month.
Why is a Cash Flow Statement Important?
As you analyze the cash flow of your business during a measure of time, you can compare it to another measure of time. This comparison could clearly reveal that something changed.
A cash flow statement may uncover a future cash emergency. Perhaps it's time to reduce expenses, take a pass on an investment or increase collections on your receivables.
Investors in your business may also wish to use a cash flow statement to measure the liquidity of your company. A positive cash flow shows that you're making smart financial decisions and managing the business well.
Understanding the cash flow in your business will help make future decisions related to all facets of your organization. Do you need to sell more? Do you need to get a lower interest rate on a loan? Do you need to fire that client? Do you need to outsource bad debt collections? All of these questions and other business decisions can be answered by diving into a cash flow statement.
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