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What Is The Purpose of a Cash Flow Statement?

What Is The Purpose of a Cash Flow Statement?

As we know, knowledge is power; therefore, understanding cash flow is key to financial success in business. The cash flow statement is a valuable tool for effective financial management and decision-making. LJS Accounting Services recognises its critical role and uses it as a foundation for collaboration with businesses.

It’s understandable if you still have some confusion about finance, despite having read numerous finance-related books or online materials.

This blog explains cash flow statements clearly and simply to avoid confusion. To better understand the purpose of a cash flow statement, what it is and how it can benefit your business, please continue reading.

 

What Is a Cash Flow Statement?

A cash flow statement is an important financial statement for companies. It displays the money coming in and going out in a certain period, such as a quarter or a year.

Sales bring money to a business, while employee salaries take money away from a business. This movement can also be known as cash inflow and cash outflow.

It goes beyond the traditional income statement and balance sheet by focusing exclusively on cash transactions. And why only cash? This is because generating cash is the lifeblood of any business. It is the most liquid and tangible form of asset that a company can have.

An asset, to a business is something valuable that a company owns. It can be either tangible or intangible and is essential for running the business operation and generating income.

Cash flow statements are vital to assess the financial health and cash management of a company.

 

What Information Is Included in a Cash Flow Statement?

The cash flow statement consists of three sections. These include operating, investing and financing activities:

  • Operating activities: this gives information about how the company gets and spends money.
  • Investing activities: this highlights any long-term investments.
  • Financing activities: this exposes how a company gets money to run its business (i.e. where the cash flow from operating activities comes from) and how it gives money back to its investors. Some examples include long-term debt, liabilities, and dividends.

 

Why Is a Cash Flow Statement Important?

A cash flow statement is a legal document required by the Financial Reporting Council (FRC). The statement displays the amount of money a company possesses. Investors and creditors use this information to assess whether a company is capable of repaying its debts. Additionally, it helps determine if the company is financially stable.

If investors or creditors lack trust in a company’s finances, they may hesitate to lend money, limiting business growth chances. To avoid this, producing accurate statements of cash flow is essential.

Statements of cash flow also help businesses make smart business decisions through effective money management. The aim is to avoid financial problems such as negative cash flow, inefficient resource use, and reduced investor confidence.

Creating a correct cash flow statement helps businesses adhere to FRC rules and manage finances to meet future goals and stay legally compliant.

 

The Advantages and Benefits of a Cash Flow Statement for a Business

The terms “advantages of a cash flow” and “benefits to a business” are related but not exactly the same.

 

Advantages of a Cash Flow Statement

The advantages of effectively managing a company’s cash flow include:

  • Liquidity Management: A cash flow system ensures enough cash for short-term obligations and prevents shortages.
  • Financial Stability: Cash flow management enhances business stability during economic downturns and unexpected expenses.
  • Business Growth: Effective cash flow management enables business growth through investments in expansion, equipment, and staff.
  • Debt Management: Well-managed cash flow helps businesses handle debts and maintain good credit.
  • Planning and Forecasting: Clear cash flow understanding aids businesses in better financial planning and accurate forecasts.

 

Benefits of a Cash Flow Statement to a Business

The following benefits are the reason why the advantages of cash flow statements are important.

  • Improved Financial Health: Well-managed net cash flow helps to reduce financial stress, therefore, improving financial health and overall business stability.
  • Increased Profitability: Efficient cash flow management can lead to increased financial gain by avoiding unnecessary costs and making strategic financial decisions.
  • Enhanced Business Operations: Having enough money allows businesses to operate smoothly, paying suppliers and employees on time.
  • Investment Opportunities: Healthy cash flow allows businesses to take advantage of investment opportunities and fund projects that drive business growth and competitiveness.
  • Credibility with Stakeholders: Positive cash flow enhances business credibility with investors, creditors, and suppliers, fostering trust and stronger relationships.

In conclusion, this blog explained the purpose of a cash flow statement in evaluating a company’s financial health and decision-making.

Are you a business owner or entrepreneur looking to improve your cash flow management? If so, why not hire an accountant?  LJS Accounting Services can help you out.

Our team of expert advisors is well-equipped to upgrade your finance and accounting processes, ensuring that your cash flow statements are accurate and efficient.

Do not hesitate to reach out to our knowledgeable advisors at 0151 601 0000 and see how we can support you. Let us simplify your accounting life and pave the way to financial success for your business.

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