Whether it's a small business or a large business, the importance of managing cash flow cannot be underestimated. It leads to prepare the cash flow statement on regular basis. Hence, the cash flow statement is of obvious benefit for any business. Below article discusses the benefits of cash flow statement.
The cash flow statement is one of the three main financial statements to provide useful information and to serve various purposes of a business entity.The other two financial statements are the Income statement and the Balance sheet.
In every business, there is a constant inflow and out flow of cash which is presented through cash flow statement. It is the major responsibility of a business entity to maintain sufficient balance of cash at all times, as this will enable to meet the needs of a business. In this way, the inflow of cash must be maintained in such a way as to meet the outflows. Hence the importance of preparing cash flow statement.
The prime objective of preparing the cash flow is to ascertain the reasons and the changes in cash position of a business entity, while it also provides the information in relation to receipts and payments of cash. It is therefore very important to prepare the cash flow statement by all businesses.
Cash flow statement helps in managing a business efficiently. It enables to evaluate the cash position and financial policies of a business effectively.
At the same time, it is of great help to undertake financial operations of a business in an appropriate manner.
During a particular period of time, by means of preparing cash flow statement, each and every movement of cash can be determined accurately. In this way, the causes and the changes in terms of cash position can be identified with certainty. It is paradoxical that a high profitability is reported on the income statement, but lower cash position is experienced by a business entity. But, in a more positive form, the cash flow statement reveals the correct picture of a business throughout a period of time highlighting the inflows and outflows of cash in relation to operating activities, investment activities and financial activities of a business.
The cash flow statement is of immense value to a business, as it reveals the success or failure of cash planning process having undertaken the comparison between the actual cash flow statement and the projected cash flow statement.
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