For business owners, understanding various financial statements is a critical part of running an effective and profitable business. From balance sheets to profit and loss statements, a business owner is tasked with making sense of various financial documents. One of the most important of these documents is a cash flow statement; indeed, cash flow statements are key to understanding your business’ profitability. For help navigating the complicated world of business financial statements and what they mean for your company, reach out to an experienced New Orleans Certified Public Accountant (CPA) who specializes in services for small businesses.
What Is a Cash Flow Statement?
As defined by Investopedia, a cash flow statement is a financial statement that summarizes the amount of cash and cash equivalents that are flowing into and out from a business. While often confused for an income statement or a balance sheet, a cash flow statement complements these other financial document types. Not only is a cash flow statement an important element of understanding your business’ financial picture, but it is also a mandatory document; in 1987, the Financial Accounting Standards Board – Statement No. 95,mandated that businesses provide a statement of cash flow.
Important for Your Business’s Profitability
Different financial documents provide you with different information.For example, while a balance statement may tell you how much you owe on a loan and an income statement may provide you with information about how much interest you paid on the loan, only the cash flow statement will provide you with information about how much cashwas consumed by servicing that loan. Because a cash flow statement measures how much cash was collected and spent over a certain period of time, it is a cash flow statement that can provide some of the most critical information about:
Most financial professionals hold that a cash flow statement is the best indicator of a company’s performance, even more precise than profit and loss statements.
When you understand your cash flow, you’ll be able to make financing and investment decisions more soundly. What’s more, creditors will also look at a company’s cash flow in order to determine whether or not the company is on solid financial footing, and therefore worth investing in/loaning money to.
Various operating activities
One of the most valuable uses of a cash flow statement is that a cash flow statement provides insight about your various operating activities, ranging from income tax payments to interest payment to rent payments and more. When you understand how your operating activities affect cash flow, you can make adjustments in a profitable way.