Financial statements are consequential for your business. They are a reality check of whether your business is financially healthy or headed for trouble. The cash flow statement is equally important. As the name suggests “cash flow” is the amount of cash going out in the form of expenses and coming in the form of revenue. Potential investors and creditors are usually impressed when a company has a good cash flow. Want to know the importance of cash flow statement? Well, then you should continue reading this article.
1. To Know Flow of Money
A cash flow statement will tell you exactly how much cash has gone into various business expenses. It is important to know how much cash is available with you in hand. When a need arises for paying bills or creditors, you know if you have sufficient cash available with you or not. Thus, you can plan your day-to-day expenses accordingly.
2. Helps in Purchase Decision
Cash flow statement will show a capital expense, unlike a profit and loss statement. A cash flow statement, on the other hand, records all day-to-day expenses and you will have an idea whether you have sufficient cash available for daily administrative activities (purchase of stationery, etc.). Thus, it helps you to decide whether to purchase any equipment or not for your daily activities.
3. Creates Excess Cash
Having a cash flow statement not only helps in managing the cash but also helps in saving some. Paying less for capital equipment, collecting money from debtors before the deadline, using your inventory more efficiently can help you have sufficient cash. Only focusing on profit and loss statements makes it difficult to concentrate on cash.
4. Helps in Future Business Operations
Having a cash flow statement helps you in determining Key Performance Indicators (KPI’s) for your business. Developing excess cash is beneficial for your company. At any moment, you may require extra funds to make up for a loss, expand the business or keep operations afloat during a recession. When you are aware of your cash flow, you can set cash reserves and create a fund for such occasions.
5. Helps Distinguish between Personal and Business Expenses
At times, you may decide to borrow cash for personal purposes from the business. For accounting purposes, personal and business expenses need to be kept separately by the owner. If the owner withdraws money for personal use from the business, he should make a note of it and be able to distinguish the used fund. Hence, a cash flow statement is important to differentiate between personal and business expenses.
These are a few reasons you should maintain a cash flow statement. Maintaining a cash flow statement throughout the year can get stressful hence, it is advised to consult a professional to help you in creating a cash flow statement.