Most businesses are well versed in the understanding of their profit and loss statement, some their balance sheet, but the cash flow statement is sometimes neglected.
As a business owner, should you focus on your cash flow statement? Is the cash flow statement important?
To understand the importance of a cash flow statement, it is best to first define it.
A cash flow statement is a financial statement summarizing the movement of cash in and out of a business over a given period of time. It is the net change in cash which results from the operating, financing and investing activities performed by the company during this period.
The income statement is based on accrual accounting, which requires companies to record revenue and expense transactions based on when they occur, as opposed to when cash is exchanged.
The statement of cash flows shows how much actual cash a company has spent as well as how much it has generated. It is valuable to understand your net cash position, as a positive cash flow is required to ensure that financial obligations can be met. The income statement may show a profitable situation and a business owner would falsely assume that the company is doing well. Given the definition of the cash flow statement and its difference from the income statement, its importance is clear. It is not only important for owner’s to use and review, it is also very important to investors.
Need help producing, or evaluating your cash flow statement? We would be happy to help.