A cash flow statement is a very important financial document about a business. As the name suggests, it tells how the cash flows in a business. Cash is vital for any business. In fact, business is carried out to generate cash and without cash, you cannot conduct a business. A cash flow statement tells you where the cash is coming from and where it is going. It is this document that reveals the financial health of a business. Investors rely on the cash flow of a business to decide whether they should pump their money into it or not. Let us understand why it is important to understand your cash flow statement.
A cash flow statement – Importance
A profit and loss statement tells you whether a company is making profits or not. But it doesn’t tell you about the financial health of the business. A company making profits can easily go out of business if it doesn’t have the cash to pay back to its debtors. With the help of a cash flow statement, you can learn whether your business has sufficient funds to divert to financial, operational, and investment activities.
A cash flow statement is one of the three important financial documents of a business, the other two being its balance sheet and profit and loss statement. All three documents reveal a lot of information about the business but it is the cash flow statement that truly reveals the performance and financial health of the business. Cash flow tells how you generate cash and what you do with it. It tells investors how cash is being generated for a business and how this money is being utilized for payments, repayments, and future growth and expansion of the business.
What does it talk about?
The cash flow statement talks about how the cash flows inwards and outwards. Three activities through which cash is generated are financial activities, operational activities, and investment activities. But how the cash flows out of a business is very important in deciding whether it is in robust financial health or not. Cash flows out of a business in the form of salaries and wages, purchases, and rent and repayments to debtors. It is this information that allows managers to make the right decisions on various activities going on in a business.
A positive cash flow means that a business is able to generate enough cash to carry out all its activities and still have money to spend on its future growth and expansion. Stakeholders in a business know that their money is being utilized in a judicious manner and they can expect a good return on their investment.
Understanding where the money comes from and where it goes makes it easier for the management to make the right decisions at the right time. It allows them to do things that can help in generating more cash whether it is through operations, investments, or financial activities. A cash flow statement is a tool scrutinized by the investors minutely to decide whether they can take a risk of investing in a business or not. It becomes easy to take your business on the path of growth and success when you understand your cash flow statement thoroughly.