Running a business requires strict control of the financial aspects on a daily basis. As a business owner, an important financial statement that helps you keep track of the financial wellbeing of your company is a cash flow statement.
This financial statement is used in conjunction with other documents, such as the income statement, profit and loss statement and balance sheet, to give a clear picture of a company’s financial standing.
A cash flow statement is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents. The cash statement reports on the cash generated and used during a specific time interval.
The cash flow statement is more effective in providing a true reflection of a company’s finances.
The cash flow statement helps when you need to break down your yearly finances. This is because it’s a true reflection of the cash that is flowing in and out of the company. It provides a picture for investors to judge whether a company is financially sound or not. Potential creditors or lenders are able to get a clear picture of a company’s ability to repay its debts.
This financial statement can be used as the basis for budgeting and business planning.
This analysis is broken down into 3 specific sections, including:
- Operating activities
- Investing activities
- Financing activities
As a business owner you can rely on a well-prepared cash flow statement to indicate the short-term viability of your company. You are able to plan ahead and to budget for specific changes or improvements to operations, product design or service provision, because you know exactly how much money is coming in and how much you’re likely to spend.
As a potential investor you are able to judge the ability of a company to pay its bills before you invest any capital into the company.
Any business that aims to be successful should start by ensuring that its financial statements, such as the cash flow statement, are in order.
