Considering the popularity of the profit and loss, people tend to underestimate the utility that the other parts of financial statements have got to offer, especially the statement of cash flows. Here are a few reasons why the statement of cash flows is important for your business and decisions:
Cash Is a Better KPI than Most Others
Focusing, merely, on the excess cash that a business generates can serve to be a better Key Performance Indicator than a lot of other items on the profit and loss accounts. Why? Well, it’s because it shows that your business is generating…well…cash! Isn’t that the purpose of doing business in the first place? Having excess cash means that your business won’t have any severe problems relating to liquidity, which is a good meter for all businesses. Having too many assets caught in accounts receivable, for example, can result into a, mere, growth on paper at times, owing to the fact that there’s always a chance that the proceeds won’t be recovered.
They Tell You Where the Money Went
Cash flow statements give you the complete picture of your cash expenses. From this, you can decipher where your money went and whether or not something needs to be addressed. Your company might be giving loads of profits on the profit and loss statement, but what if you don’t have enough cash to make the next payment for your loan? Won’t that put the going concern assumption for your business in jeopardy? Such and other similar issues cannot be identified through a look at the profit and loss statements, merely. Analyzing your cash flows, every once in a while, will help you in streamlining your expenses.
A Focus on Cash
If the statement of profit and loss all that you consider, you’ll be a subject to the false impression that generating profits is the only way to generate excess cash, when it’s not. Creation of excess cash can be done, also, through taking measures such as cutting down your expenditures. Or, in other words, cash creation can be done while spending cash. As an example, consider that a company collects from customers faster and more efficiently than it pays off its suppliers. Hasn’t the company created extra cash using this simple measure? Such insight can only be gained through the statement of cash flows.
Making Big Decisions
Will you be able to finance your assets in the long term? The fact of the matter is that expansion requires not only the generation of assets but also the financing of it. An analysis of the cash flows will give you an idea of whether or not you’ll need to use external sources for the purpose of financing your growth. There are a number of decisions that can be taken in this regard, hence an understanding of the cash flows statement is important to ensure that you make the correct one.
Considering the importance of cash flow statements for your business, you’ll be best served by putting your faith in professionals for expert advice. If you’re looking for advice on how you can make the most out of your cash flows, SKB Accounting has got your back!