Cash flow statements! So, you have heard about them often but do not know exactly what they do! Through this article, know what they exactly mean, the benefits they provide to your business and some more key information.
What is a cash flow statement?
A cash flow is simply the net amount of cash transferred in and out of your business. A cash flow statement is a statement that shows all the details of these incoming and outgoing cash in your business for a particular accounting period.
Business activities like investing and operating are responsible for cash inflow and the cash flow statement shows the details of all such activities. Moreover, other business activities which are responsible for cash outflow like expenses paid for business are also displayed in the cash flow statement. This information is crucial for businesses to predict cash forecasts for short-term business project planning. Also, a cash flow statement is important to determine your business performance.
Before knowing how a cash flow statement can help your business, let us know what it consists of.
Contents of a cash flow statement
The format of a cash flow statement contains three major parts that helps your business in cash flow analysis. Know them:
1) Operating cash flow
Operating activities are cash flow activities that generate revenue or keep an account of money that is spent on producing goods or services of your business. Some examples are tax payments, inventory transactions, interest payments, etc. Naturally, the cash flow details for such activities are called operating cash flow.
2) Investing cash flow
Investing activities record profits and losses which happen due to investment in assets such as property, plant or equipment, etc. The cash flow involved in investing activities are termed as investing cash flow and indicates the overall change in cash flow for your business.
3) Financing cash flow
The money movement activities that take place between a company and its owners come under financing cash flow. This involves debts, equity, and dividends.
Benefits and importance of cash flow statements
The availability of cash to fulfill your business requirements is of prime importance. Paying back your business debts, investments for profitable returns, and similar activities need liquid cash. A proper cash flow statement can help to maintain the availability of cash at such critical moments. Additionally, cash flow statements can provide more benefits. Know them:
1) Helps you know your spending details
It gives clean details of principal payments that your business makes to its creditors. Many transactions are recorded in cash but are not captured in any other financial statements. Such transactions are clearly recorded in cash flow statements and by looking at them, you know where the cash was actually spent. One such example could be extending credit to important and trustworthy customers.
2) Helps you maintain proper balance
You can understand your cash spent with the help of cash flow statements. By deeply analysing cash flow statement details, you can understand if much of the cash is just lying idle or if there is a shortage of cash that is required for important business needs. When such important information about your cash is at your fingertips, you can invest the excess funds for your business growth and proactively look for sources to borrow funds in case of shortage.
3) Effective short-term planning
Effective cash flow management is a trait of a successful business. One major aspect of good cash flow management is maintaining liquid cash for fulfilling short-term business goals. By analysing transactions from the cash flow statement, you can gauge how much cash you can save in a specific period of time and then use it to pay debts. Such forecasting is of utmost importance to run a business smoothly and cash flow statements play a major role to forecast such cash availability.
Additional information: Say ”NO” to negative cash flow
When it comes to cash flow, it is very important for a business to NOT have a negative cash flow. Negative cash flow happens when your outgoing cash is more than your incoming cash. This means the money that your business is earning is not enough to cover your business expenses. If your business is expecting a huge profit in near future and presently experiencing a negative cash flow temporarily, then such a calculated risk is not a reflection of your business’ bad performance. But, if the negative cash flow is increasing and existing perpetually, it starts showing degrading signs for your business. Therefore, negative cash flow should be avoided.
It would not be wrong to say that cash flow statements help to better your cash flow management. You should analyse cash flow statements for different accounting periods. This will not only help you to predict your business’ future but also to predict the suitable time for business expansion and growth. The cash flow statement’s benefits briefed above are just a few to tell. When you go deeper into your business’s cash flow statements, they will reveal a lot more they can do to make your business better. So why wait? Discover MyBusiness app today which can make your such accounting tasks easier along with its more upcoming features.