One major reason why businesses fail in their early years is a lack of proper finance management. Having a solid financial system and handling procedure will go a long way in helping a business thrive during any financial crisis. That is where a cash flow statement comes in.
In this article, we’ll discuss five reasons why having a cash flow statement is important and how it can help your business. Let’s get started.
Business Cash Flow Statements
The flow of money out of and into an organization is known as cash flow. The cash flow statement is a type of financial statement that details the sources and uses of a company's cash over time. It helps shareholders and investors understand the revenue and expenses of a company. The shareholders and investors will carefully review the statement to determine whether a company's business is financially sound or not. The three main types of cash flows for a business are cash flows from operations, investing, and financing. Cash flow from operations is net cash received from sales and services less cash spent on operating expenses. Cash flow from investing is cash spent on items to be used over multiple years to increase the profitability of the business (i.e., equipment, technology, investments, etc.). Cash flow from financing is money received as debt or equity or paying off debts or making distributions to shareholders.
5 Reasons Why a Cash Flow Statement is Important
1. You Can Easily Track the Company’s Expenses
A cash flow report can clearly show how your company's money is being spent. Cash flow statements provide a detailed view of all the payments that businesses make that are often not included in a profit and loss statement, such as loan payments. A cash flow statement would have this data, revealing how much your company actually spends.
2. It Helps in Short and Long-Term Financial Planning
Companies can utilize cash flow statements to help with short-term and long-term planning. They can support financial managers in planning for future cash flow and monitoring spending to achieve specified short-term objectives. Managers can also use them to find, doable adjustments.
3. It Improves Crisis Management
A cash flow statement can help in crisis management by letting shareholders know whether there is an excess or shortfall of cash on hand. Management may be able to think of solutions to assist the firm in overcoming such an issue in advance if they can predict a probable financial deficit for the company's future.
4. It Helps To Analyze Working Capital
The money currently available in a business that can be used for operations is referred to as working capital. Business executives, investors, and shareholders can use cash flow statements to analyze working capital movement inside a company. A company can more easily enhance its operations using this research to protect cash and increase inflows.
5. It Helps in the Increase of Cash Flow
The goal of every business is to make a profit. In addition to the profit, there are additional ways for the business to generate income. Using a cash flow statement as a focal point will help you find and apply these strategies.
A cash flow statement is one of the most important financial instruments used by investors and shareholders to determine the company's financial health. Now is the best time to create your business cash flow statement if you haven't already. Reach out to CBK Pros for any questions or assistance. We’re here to help!