Money is the lifeline of any business. Why? It is money that makes things run! It pays off employee salaries, allows for the organisation to invest in machines and the like, and so much more. Really, with no money, a business will quickly die out. That's why it is so important for you to understand the cash flow statement!
That said, let's delve into the cash flow statement, talking about all you need to know about it:
What Is the Cash Flow Statement?
A cash flow statement is a financial statement that provides a detailed overview of a company's cash inflows and outflows over a specified period of time. The statement can be used to assess a company's liquidity, solvency, and cash management efficiency.
What's in the Cash Flow Statement?
The cash flow statement has three main sections: operating activities, investing activities, and financing activities. Each section provides information about the cash inflows and outflows associated with that particular type of activity.
Operating activities include cash inflows and outflows from a company's core business operations. This section provides information about a company's cash receipts and payments related to its sales, expenses, and other day-to-day business activities.
Investing activities include cash inflows and outflows from a company's investments in long-term assets, such as property, plants, and equipment. This section provides information about a company's cash receipts and payments related to its investments in long-term assets.
Financing activities include cash inflows and outflows from a company's borrowings and equity transactions. This section provides information about a company's cash receipts and payments related to its borrowings and equity transactions.
What Can the Cash Flow Statement Be Used For?
The cash flow statement can be used to assess a company's liquidity, solvency, and cash management efficiency.
Liquidity is a measure of a company's ability to meet its short-term obligations. The cash flow statement can be used to assess a company's liquidity by calculating the net cash flow from operating activities. This figure represents the cash inflows and outflows from a company's core business operations.
Solvency is a measure of a company's ability to meet its long-term obligations. The cash flow statement can be used to assess a company's solvency by calculating the net cash flow from operating activities and the net cash flow from investing activities. These figures represent the cash inflows and outflows from a company's core business operations and its investments in long-term assets.
Cash management efficiency is a measure of a company's ability to generate and utilise cash flows from its operations. The cash flow statement can be used to assess a company's cash management efficiency by calculating the net cash flow from operating activities and the net cash flow from investing activities. These figures represent the cash inflows and outflows from a company's core business operations and its investments in long-term assets.
Conclusion
As you can see, cash flow statements are so important. Not only does it help you quickly understand your business' financial status, but it can also provide you with the information you need to further improve your cash flow. That being said, a good accountant will help you understand a cash flow statement and will also help use the information to create better ways to manage your cash to grow your business! So, if you have yet to learn about cash flow statements or even use them, put the effort and time into it right away.
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