Why is a Cash Flow Statement Important?

You’ve probably heard the name “Cash flow statement” quite often, but what exactly is a cash flow statement and why is it so important?

Well, in simple terms – we can describe a cash flow statement as a financial statement that shows you how your business has spent its cash. It entails the business’ cash position and usually goes together with a Balance Sheet and a Profit and Loss statement.

The success of any business depends on its sustainable cash flow and cash as we all know by now, helps pay expenses, taxes, bank loans and also assists in purchasing new assets. A cash flow statement in this regard can help you understand whether or not your business has enough cash to execute these financial activities.

Now, let’s highlight the importance of a cash flow statement and its benefits.

 1.     A Cash Flow Statement Tells You Where the Money Went

The difference between determining a profit and a positive cash flow for a business is that a profit and loss and statement does not show you about the exact (principal) payments you make. You can have reasonably good profits; however, your expenses could be putting you out of business without you even realizing.

A cash flow statement tells you exactly where you spend your money and how. From increasing spending on inventory to extended creditors and buying of equipment. A cash flow statement can show you all of this.

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 2.     Cash Flow Statement Helps You Determine Your Financial Position

I’m sure you’ve heard the saying “Cash is king” before and this saying goes a long way in finance. A cash flow statement plays an important role in helping you determine where your business is financially and whether or not your business can stay solvent.

With this financial statement; you can forecast whether your business can pay its dues and if you are anywhere near close to having your business declared as bankrupt.

3.     Cash Flow Statements Provide Good KPI’s

Through the use of cash flow statements; you can get better KPIs (Key Performance Indicators) and this helps you develop excess cash.

Being able to know what drives the development of excess cash helps you create value for the business and what better way to do this than forecasting through the use of a cash flow statement?

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4.     Helps with Financing Decisions

Purchasing most business essentials requires the use of cash, growing your business requires cash, buying more inventory requires cash, increasing customers need cash. The business runs on cash and how would you know when and where to use your cash without properly assessing if you can afford to settle those expenses? That’s where your cash flow statement comes in.

A cash flow statement helps you understand how your cash is going to finance the growth of your business. This financial statement helps you understanding where your cash goes and how you will provide more cash when you need it.

Understanding your cash flow statement helps you make better decisions about your business and it also helps you know where you stand as a business and sometimes it is very difficult to do so when you don’t have the knowledge and expertise to go about compiling one, to begin with.

Asking for advice and seeking professional help with your financials and understanding your business’ cash flow is the best decision you’ll ever make for yourself and business. Get in touch with me and let’s help you manage your cash flow for success!

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