How Cash Flow Statements Work

A cash flow statement is known to provide information about how much cash is generated and used in a company over a given period of time. It is an important financial statement that is in contrast with the accrual-based information from the income statement. While the income statement focuses on revenues when earned, the cash flow finance statement focuses on cash receipts when collected.

The cash flow statement, income statement, and the balance sheet statement are the three important statements used in a company to gauge their performance and overall health. Compared to the other statements, the cash flow is the best to test the liquidity of a company as it changes over time and also determines how viable the company is over a short period. 

A cash flow statement is divided into three categories, including the operating activities, investing activities, and financing activities of the company. The amount spent over time from these three activities is summed up to get the total change in cash. This total is then added to the opening cash balance to get the closing cash balance after the expenses. This process makes up the cash flow statement for that period. 

Why Do You Need Cash Flow Statements?

Every company requires a cash flow statement, as it helps determine the business cash position, which shows how much the company has per time. A business must have sufficient funds in order to thrive, as there will always be expenses to take care of. 

Here are three key reasons why you need cash flow statements:

1. It Tells You Where Your Money Went

Money comes and goes in businesses but with a clear cash flow statement, you can easily tell the expenses that are eating up the money. This is different from a profit and loss statement in the sense that it tells you where exactly you spent your money, including where you increased inventory, extended credit to customers, or bought capital equipment. It also provides a better key performance indicator compared to profit and loss statements. 

2. It Helps with Financing Decisions

With a clear statement on how you spend money in your business, you will make better financial decisions. This is because you now know that every move you make might require cash. You will always need cash for your business but you don’t have to spend excessively without knowing why or how. A cash flow statement will make you deliberate about where you choose to spend, so you don’t keep running out of cash. 

3. It Helps You Focus on Creating Excess Cash

Since you know what is taking your money in your business, you can work on creating other streams of income to help run your business. Every business will require money but having a clear statement on how the money is spent will help you focus on how much more cash you have to create and how to go about it. 

Conclusion

If you don’t have a cash flow statement for your business, there is no better time than now to start working towards one if you want to see your business thrive.