For a business to be successful, it should always have sufficient cash. This enables it to pay back bank loans, buy commodities, or invest to get profitable returns. A business is declared bankrupt if it doesn’t have enough cash to pay its debts. Here are some of the benefits of a cash flow statement:
- Gives details about spending: A cash flow statement gives a clear understanding of the principal payments that the company makes to its creditors. It also shows transactions which are recorded in cash and not reflected in the other financial statements. These include purchases of items for inventory, extending credit to customers, and buying capital equipment.
- Helps maintain optimum cash balance: A cash flow statement helps in maintaining the optimum level of cash on hand. It is important for the company to determine if too much of its cash is lying idle, or if there’s a shortage or excess of funds. If there is excess cash lying idle, then the business can use it to invest in shares or buy inventory. If there is a shortage of funds, the company can look for sources from where they can borrow funds to keep the business going.
- Helps you focus on generating cash: Profit plays a key role in the growth of a company by generating cash. But there are several other ways to generate cash. For instance, when a company finds a way to pay less for equipment, it is actually generating cash. Every time it collects receivables from its customers quicker than usual, it is gaining cash.
- Useful for short-term planning: A cash flow statement is an important tool for controlling cash flow. A successful business must always have sufficient liquid cash to fulfill short-term obligations like upcoming payments. A financial manager can analyze incoming and outgoing cash from past transactions to make crucial decisions. Some situations where decisions have to be made based on the cash flow include for seeing cash deficit to pay off debts or establishing a base to request for credit from banks.
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