Why Do We Need Cash Flow Statement?
Every business needs to generate some crucial financial statements (Also see 4 Things about Financial Statements Every Business Owner Should Know) in every accounting period as these statements are essential in analysing the financial health of the business. Business owners may choose to generate these statements on their own, hire in-house accountants, or engage a bookkeeping services in Singapore and let the professionals complete this task for them.
The cash flow statement (Also see Preparing the Statement of Cash Flow) is one of the vital financial statements that all companies should prepare in an accounting period. This statement can reflect the amount of cash inflow and cash outflow as well as the activities that cause these cash flows. Thus, by reading this statement, the readers will be able to know whether the primary business operations of the company are sustainable. This statement also shows the company’s financial position and the performance of the management’s decision. After getting this information, the readers can obtain the company’s liquidity status and make reasonable assumptions based on the data provided in the cash flow statement.
The purpose of generating the cash flow statement (Also see 4 Rules for Managing Business Cash flow) is to reveal the amounts of cash that are flowing into and out of the company. It also shows why and how those amounts are flowing. This means that the cash flow statement is a statement that shows how much money the company has earned and how it uses its money. Apart from showing the cash flow related to the company’s operating activities, this statement also shows the amount earned or spent on other activities, which are investing activities and financing activities.
Besides, the cash flow statement is a useful tool that can help readers understand how the company achieves certain figures. This is because it shows where the cash inflows come from and to where the cash outflows head to. This is crucial because in some cases, some events may make the figures seem better than usual, and those events are not going to happen repeatedly. As an example, a company has shown a positive cash flow, which seemed to be a good sign. However, in the cash flow statement, we get to know that the cash flow that comes from the company’s core business activities is actually negative. The positive figure appears due to the sale of obsolete machines, which is where the company obtain cash inflow.
By studying the cash flow statement, one will be able to know the strategies that the company’s management is implementing. For example, the sum of cash flow from operating activities of Summer Corporation has shown a negative figure. Under the investing activities section, the number was positive as it sold some machines and has obtained cash from the sale. This indicates that Summer Corporation is trying to remain solvent as it may be unable to find investors to inject funds for the business. In this case, the investors should follow up any announcements the company makes to understand the situation more clearly.
In short, the cash flow statement provides information related to the cash inflows and outflows to the readers of the financial statement (Also see Who Needs the Financial Statements?). Also, it serves as an essential indicator of the company’s liquidity. Thus, by reading this statement, the investors will be able to determine whether the business is solvent or having financial problems.