For any business, a cash-flow statement is a bookkeeping tool that provides information and alerts about two key funds within a business. These funds are divided into outgoing funds, known as payables, and incoming funds, known as receivables. A cash-flow statement also reveals how well a company is managing its cash and cash equivalents by providing a detailed analysis of operations, investments, and other financial activities. Having a well-researched and accurate cash flow statement can greatly affect the success of a business. Read on to learn 5 reasons having a cash-flow statement is important.
A Cash-Flow Statement tells an organization if it is running out of money while remaining profitable
As a business develops, its growth and profitability can succeed rapidly. In these cases, the bookkeeping tool of a cash-flow statement can be used to inform the business of any cash-flow problems they may have, despite being profitable. This detection can help the company adjust its budget in order to maintain a positive cash flow. Just because your business is successful, does not mean you have positive cash flow and this statement will shed light on how to make sure you are successful with positive cash flow.
A Cash-Flow Statement tells a business entity if the owner is expending too much money
Another advantage of a cash-flow statement is that it provides financial information to the managers and other stakeholders, particularly regarding cash withdrawals. The importance of keeping track of these withdrawals is to ensure that the delegation of investor funds is allocated to the proper areas. These types of withdrawals will not show up in profit or loss reports but will appear on the cash-flow statement. The idea behind this practice is to be sure that there are no excessive withdrawals and that funds are properly distributed.
A Cash-Flow Statement shows the results of building an inventory, allowing receivables to grow, or paying suppliers more rapidly
Changes in the inventory, receivables and payments to suppliers are not shown in a company’s profit and loss statement. However, these components will appear on a cash-flow statement, and businesses must analyze all details and make appropriate adjustments to their inventory, receivables, and supplies. This analysis and adjustment can be crucial because it will show what cash a company has remaining after these issues are addressed.
A cash-flow statement shows capital purchases made as an expense
Additionally, a cash-flow statement will show all the capital available for the purchase of necessary equipment. If a business requires certain pieces of equipment, it can then identify how to finance them. A cash-flow statement will provide clarity about the expenses being incurred, as well as what is available to spend. Think of this statement as a type of budget. Or better, use it to create your business’ financial plan. This will be an important strategy when making any capital purchase decisions.
A cash-flow statement shows how the bank loan payments of a company are affecting its cash.
Loans are often a necessary part of financing a company. It is simply a necessary evil all business owners must undertake at some point. The loan payments of an organization and how they impact available cash are tracked on the cash-flow statement. This statement should include payment amounts and due dates, which can illuminate various expenditures and prevent incurring more debt. In fact, this tracking of loan payments can be the difference between the failure and success of a business. If the statement indicates that loan payments are affecting the cash available, adjustments can be made to avoid a negative effect on the business.
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