Statement of Cashflows - Definition and Detailed Explanation


Cash flow statement

What is Cash flow statement?

Cash flow statement also referred to as Statement of Cash Flows is one of three main financial reports that are generated regularly. It is used to show how much cash the company has on hand during a specific period of time. The cash flow statement provides all cash inflows and outflows of the company through 3 main areas operations, investment, and financing. By analyzing this statement, the company’s stakeholders such as investors, banks, shareholders, even potential staff could have a more accurate picture of the health of the company.


Why is Cash flow statement important?

First, the Cash flow statement could show the company’s liquidity. That means the company’s owner knows correctly how much money they could you if needed. Therefore, they can consider what they can afford and what cannot.


Second, the Cash flow statement shows changes in Assets, Liabilities, and Equity in the form of cash flows.


Third, the Cash flow statement lets the company’s owner forecast future cash flows and plan how much liquidity the company could have in the future. That’s important for making long-term plans.


What is Cash flow?

Cash flows could be expressed as the investment of cash into or out of an account, a business, or an investment. Those include Cash Inflow and Cash Outflow. Cash Inflow is money coming into the business’ possession. It could be revenue from customers to whom we sold goods, liability from the bank, or money from investors. On contrary, Cash Outflow is the money going out of the business. It could be used to pay payroll expenses, pay bills from vendors, or pay back loans to banks. At the bottom line, the net cash flow is calculated by subtracting cash outflow from cash inflow. If the figure is Positive, the total money coming into the business exceeds the amount coming out. If the figure is Negative, it is not a sign of good financial health.


Although the Cash flow statement could show us a clear view of what we've paid and what remained, it is not recommended to analyze the Cash flow statement only. The reason is that if most of the money inflows the business come from Debt, the business is in financial trouble now. The advice is to use Balance Sheet analysis (to know all money and debts) and Profit and Loss analysis (to know all amounts in and out to support the business) in conjunction with the Cash flow statement. As a result, you can see a whole picture of the financial health of the business whether cash is available for the company to function.


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