Preparing cash flow statement on regular basis is an important thing to do in a business organization. It not only reveals the increase or decrease in cash, but it also helps in predicting the amounts, timing and uncertainty of future cash flows. This article provides the reasons why cash flow is important to a business organization.
In financial accounting, a cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities.
The cash flow statement is one of the main (5) financial statements. The other four financial statements are: Balance sheet, Income Statement, Statement of Comprehensive Income and Statement of changes in Stockholders’ equity. In business, there are several reasons for preparing cash flow statement. Some of the major ones are discussed in this article.
Cash flow statement helps in efficient management of cash. One of the most important functions of a financial management is to manage cash resources in a manner that sufficient cash is available to meet its short term obligations. Thus, a cash flow statement is a useful tool for doing so. It not only helps managers to ensure that adequate cash is available to meet the liabilities, but it also enables the management to properly plan and coordinate its financial operations.
Cash flow from operating activities is a section of the cash flow statement that provides information regarding the cash-generating abilities of a company's core activities. Operating cash flow (or cash flow from operations - CFO) is found in the cash flow statement’s operating activities section.
As the repayment of long term debts depends on the availability of cash, the cash flow analysis helps the management in determining the possibility of repayment of long term debts. It thus better predicts the amounts, timing and uncertainty of future cash flows.
As much it is important for finance managers to determine the increase or decrease in cash position, as it is to find the reasons thereof. The cash flow statement aids finance managers greatly in understanding and explaining how the company is short of cash despite the fact that it generates higher profits.
Making comparative financial statements is of great value and importance for a business entity for a number of reasons. It helps in assessing the performance over multiple periods. It also reveals information for more than one accounting period. The budgeted cash flow statement, when compared with the actual one, discloses the success or failure of the management in managing cash resources. Not just this, it also aids greatly in taking remedial measures in case there are deviations.
It is thus to be said that the cash flow statement is a better tool of analysis. It not only provides information regarding inflows and outflows of cash of a firm for a period of one year, but it also helps finance managers to ensure whether or not sufficient cash is being generated to maintain a healthy business.
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