This article delves into the purpose of cash flow statements. Like master storytellers, we reveal how these statements do more than track cash movement - they narrate the saga of a company's economic vitality. For the astute finance professional, this is your guide to interpreting the ebbs and flows of financial success through the lens of cash flow.
Cash flow statements are also helpful for investors to see how much money their companies are making (or losing). Comparing current year numbers with the previous year via cash flow analysis makes it easy to check if your company has improved or worsened in terms of its financial health.
A typical cash flow statement has three main sections: operating activities, investing activities, and financing activities. Each section contains one or more subsections that provide more detail about previous transactions and their impact on cash flow.
Operating activities include all the regular day-to-day business transactions you perform. For example, if you sell products or services, this would be called revenue (or sales). And if you purchase products or services for your business, this would be called expenses.
The most common categories of operating activities include:
Investing activities include:
In other words, the investing activities section shows how much money you spent on longer-term assets such as property, plant & equipment (PP&E), or other companies.
For example, if a company buys new computers for its employees, that would be recorded as an investment expense. On the other hand, if a company sells some PP&E it previously owned (or pays off some debt), that would also show up as an investing cash inflow.
Financing activities show how a company raises capital and pays it back to investors through capital markets. Some of the most common financing activities also include:
A cash flow statement is helpful for many reasons, including forecasting future earnings potential and identifying areas to improve profitability through cost-cutting measures. A company's ability to generate positive cash flows from operations is often essential when lenders evaluate loan applications or lines of credit from banks.
In addition, investors who want to gauge whether a company's earnings reflect operational efficiency may look at its operating cash flows and net income figures on its income statement to see how consistent they are over time. A cash flow statement can help determine whether a business is financially solvent.
Understanding the different uses of cash flow statements is crucial for effective financial management. These statements, pivotal in revealing a business's liquidity, offer invaluable insights for various stakeholders.
Decision making for management: Cash flow statements help management make informed decisions. For example, if a company's cash flow from operations is consistently positive, it indicates healthy liquidity, enabling expansion or new investments. On the other hand, a negative trend might signal a need for cost-cutting measures.
Investor Assessment: Investors use cash flow statements to gauge a company's financial health. Positive cash flow indicates that a company is well-positioned to generate returns, making it a more attractive investment proposition.
Lender Analysis: Banks and creditors often use cash flow statements to determine a company's creditworthiness. Consistent positive cash flow suggests a company can meet its debt obligations, thus lowering credit risk.
Internal Planning and Forecasting: These statements assist in business forecasting. By understanding cash inflows and outflows, companies can better plan for future financial needs, ensuring they maintain adequate cash reserves.
For businesses looking to streamline their financial processes, our expense management solution and company cards offer real-time visibility into cash flow, making tracking and managing these crucial financial aspects easier.
One of the biggest challenges for finance and accounting teams is capturing all transactions that impact the cash flow in and out of the business. This process requires a robust company card and expense management solution (to capture expenses in real-time) and great integrations with accounting software to show exactly what is available.
Payhawk's spend management solution, including company cards and expense management software, helps CFOs and financial leaders get insight into the cost of doing business by showing spend in real time and correctly assigning it to an appropriate category.
Some of the key benefits of Payhawk's spend visibility include:
Cash flow statements are essential for your financials. They show us how well a business uses it's cash and how healthy its operations are. A good cash flow analysis will tell you if a company can pay its bills on time and if it has enough cash to sustain operations in the future.
A company might look profitable, but if it can't generate enough cash from its business activities, then it's in trouble. The balance sheet tells us how much money a company has, but the cash flow statement tells us how much it's actually getting from its operations.
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Trish Toovey works across the UK and US markets to craft content at Payhawk. Covering anything from ad copy to video scripting, Trish leans on a super varied background in copy and content creation for the finance, fashion, and travel industries.