Why Are Cash Flow Statements Important for Business?

CASH FLOW STATEMENT (CFS)

Cash Flow Statement is an additional information provided to the users of accounts in the form a statement, which reflects the various sources from were cash was generated by an enterprise during the relevant accounting year and how these inflows were utilized by the enterprise.

To sum up cash flow statement (CFS) is a financial statement that summarizes the inflows and outflows of cash transactions during a given period.

Objectives of Cash flow statement:-

• Identify the historical changes in the flow of cash and cash equivalents.
• To assess the ability of the enterprise.
• Estimate further requirement of generating cash and cash equivalents.
• In examining the relationship between profitability and net cash flow and the impact of changing prices.
• To compare the operational efficiency of different enterprises.
• As an indicator of amount,timing and certainty of future cash flows.

Why cash flow statement?

• Insight into spending activities

Cash flow statements shows transactions that are not reflected in profit and loss account. Cash flow report can give precise flow of outflow.

• Short-term planning

Cash flow statements are especially useful to companies when it comes to short-term planning. All companies must stay solvent to avoid bankruptcy and meet obligations, such as paying wages, operating costs and more. Because cash flow statements provide a detailed report on how much cash a business has on hand at a given time, they can help financial managers project the cash flow in the near future and keep track of spending to meet specific, short-term goals.

• Working capital analysis

Working capital is defined as the funds that are currently available to businesses—the amount of cash, deposits or other reserves kept on hand to manage operational and day-to-day expenses.

Types of cash flows Cash

Flow includes three main components: -

Cash flow from operating activities

The operating activities of the cash flow statement include activities related to the core business. In other words, this section measures the cash flow from a company’s provision of products or services. Some examples of operating activities include sales of goods and services, salary payments, rent payments, and income tax payments. Cash flow from investing activities Investing activities include cash flow from the acquisition and disposal of long-term assets and other investments not included in cash equivalents. These represent long-term investments in the company’s growth. For instance, purchasing or selling physical property, such as real estate or vehicles, and non-physical property, like patents.

Cash flow from financing activities Cash flows related to financing activities typically represent cash from investors or banks, issuing and buying back shares, as well as a dividend payment. So whether you are availing a loan, paying interest to service debt, or distributing dividends, all these transactions fall under the financing activities section in the cash flow statement.

Conclusion

Cash is the lifeblood of every business. Therefore, understanding and managing cashflows are very important.

Cash flow statement is a statement of inflows and outflows of cash and cash equivalents. It provides a report on performance of the company during a particular period of time which helps the management to evaluate and take decisions accordingly.

Therefore, Cash Flow Statement play an important role in an organization for evaluating, reporting and to take actions accordingly.