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why do we need cash flow statement

The three standard statements of most financial packages include the, the, and the Cash Flow Statement. The P L is often considered the most important and relevant statement by most owners, managers, and analysts, however, the astute accountant can make a strong argument about why the Balance Sheet is really the most important statement of the three. And then there is the Cash Flow Statement, often overlooked, usually misunderstood and skimmed over with a fleeting glance, but a very critical and integral part of the financial statements. The Cash Flow Statement is the Бnew kid on the blockБ that was first required on the financial statements of public companies in 1988, but is an integral part of financial reporting that ties the other reports together for a complete picture of a companyБs financial health. It tells owners and other financial statement users one very important thing Б how much cash the company generates. A company can choose to use the direct method or indirect method of presenting the cash flow, however both methods provide the same general synopsis. How much cash the company started the period with, how the company spent its cash, how the company received its cash, and the ending cash balance available for future investment or distribution to owners. As you can see these are some very important issues. Б Revenue-generating activities of the business entity, they include cash effects of transactions by which net profit or loss is determined. Typically activities involving the acquisition and sale of fixed assets (i. e. and, building and equipment) but can also include stocks and other investments if not held for resale as a primary business activity.

Activities which change the size and the composition of ownersБ capital or changes in debt. (i. e. contributions, distributions, stock issuance and purchase, and debt). Cash can come from both internal and external sources, and the Statement of Cash Flow helps companies and investors separate and observe the differences and extent of the cash inflows and outflows. Internal, as opposed to external cash sources, provide a company with successful attributes and assurances that include:
1) 2) preventing unnecessary expenditures from interest, late payment penalties and debt costs 3) 4) 5) and most importantly Б ensuring a level of regular business income without relying on outside investment or cash borrowing. Effectively managing and monitoring cash flows serves many purposes. The most significant reason is to provide owners and managers insight into the companyБs cash position. This knowledge better equips management to make informed decisions about regular business operations, the need for further investment in the business, and capital from equity or debt partners. Cash management is something most businesses of all sizes struggle to perfect. While the Cash Flow Statement is by no means the only method of monitoring cash flows, it is an integral part of the and should not be overlooked by the financial statement users.

Tags: Without cash your business wonвt run, your employees become cranky and suppliers stop shipping you, and believe it or not you can run out of cash while your business is very profitable. That happened to me. When I was in my vending business I had great profits but no cash. I went to a seminar where a couple of very wise people showed me the error of my ways. I learned that profit and loss statements are not nearly as important as cash flow statements when running a small company. A cash flow statement tells you where the money went. A profit and loss statement says nothing about principal payments you make to the bank. You could have reasonably good profits, but the amount of money you pay your bank every month could be putting you out of business. Cash flow statements tell you where you spent your money. If you increased inventory you used cash. If you extended more credit to customers you used cash. If you bought lots of capital equipment you used cash. All three of these issues wonвt show up on your profit and loss statement. A cash flow statement can help you focus on creating excess cash. Having profits is important. Profits are one of the things that help create cash. There are other things that can also help you create cash. If you can pay less for capital equipment you need you are creating cash while spending money. If you can collect receivables from your customers faster you are creating cash. If you use inventory more efficiently you create cash.

Concentrating only on your profit and loss statement makes it difficult to focus on cash. Cash flow statements often provide better KPIвs (Key Performance Indicators) than profit and loss statements. I believe developing excess cash is a great KPI. This is an activity that literally every area of your company can get involved in through individual drivers. I think being able to know what moves the needle on developing excess cash often helps to create value. Knowing what needs to move the needle on profits is only part of the story. Companies that concentrate on creating excess cash often also create better enterprise value than those companies that only concentrate on profits. Cash flow statements help with financing decisions. Buying capital equipment uses cash. Growing capacity in your company uses cash. Adding inventory uses cash. Adding customers uses cash. The question when we grow our company isnвt whether we will use cash (we will) itвs how are we going to finance our growth. Sometimes youвll just use excess cash provided from profits. Sometimes youвll have to borrow money from the bank. Sometimes youвll need to raise outside capital. Understanding where your cash goes and how you will provide more cash when you need it are key parts of running a successful company. Donвt be like me and run out of cash without knowing why. Understanding your cash flow statement will allow you to make better decisions about your business.

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