If you run a business, you know that ups and downs are a part of this business. But how you manage the cash flow of your business is important not just for its growth and success but also for your investors. The cash flow statement of your business is one parameter that investors are most interested in. It tells them how well you are managing the money and what the financial health of your business is. These are the reasons why it is crucially important to show good financial management reports to your investors.
Negative and Positive Cash Flows
Cash flow means the money that comes in and goes out of your business. Money usually comes in through customers who buy your products or services. It goes out in the form of salaries and wages, purchases of raw materials and equipment, and also payment of taxes, rent, and loan repayments. A positive cash flow means more money is coming in than going out. On the other hand, a negative cash flow means more money is going out in the form of expenses than what you are earning as a business owner.
Good cash flow management instills confidence in the minds of investors. It tells them that your business enjoys robust financial health and that their money is safe if they decided to invest in your business. After all, the only thing that investors care about is their own money. They will invest in your business only when they see high chances of repayment and a good return on their investment.
Importance of Financial Management
Cash is king they say, and they are not wrong. A good business must be able to generate enough cash through sales of products and services so that it is able to meet all its expenses and still have sufficient funds to pay back to investors. In fact, cash flow management should be such that the business has sufficient funds to pump money back into the future growth and expansion. Of course, it is an ideal situation for any business but most of the investors are looking at cash flow statements to find out businesses that they can invest into.
A company can fool its shareholders by fudging numbers in its balance sheet. But it cannot hide the financial health of the company from the prying eyes of the investors when they go through its cash flow statement. It tells them the whole story about where the money is coming in from and where it is going out. An investor can learn about how the business is utilizing funds to carry out operations, financing, and other important activities by going through its cash flow statement. If this document tells them that the business is not generating enough funds to repay its debt obligations, they tend to shy away from such businesses.
A business needs to remain in a positive cash flow situation so that it can easily meet its short-term as well as long-term capital requirements. No amount of future plans can impress investors unless you have a positive cash flow statement, which lets them know about how good your financial management is.