The Cash Flow Statement is one of the essential financial statements used by investors, accountants, and business owners (the other essential financial statements being the Balance Sheet and Profit and Loss). It is used to report the cash generated and spent during a specific time interval that is specified in the statement’s heading. The Cash Flow Statement is sometimes referred to as the statement of cash flows.
The Cash Flow Statement assesses the amount, timing, and predictability of cash-inflows and cash-outflows. It focuses on the types of activities that create and use cash; whether they are operations, investments, or financing. The Cash Flow Statement is especially useful in determining the amount cash flow generated by operations as opposed to the amount of profits being reported on the Profit and Loss.
For Business Owners and Managers
Business owners and managers can easily compare cash from operating activities to the business’ net income. If the cash from operating activities is consistently greater than the net income, the business’ net income is said to be of high quality. On the other hand, if the cash from operating activities is less than the net income, a red flag is raised as to why the net income is not turning into cash.
For Lenders and Investors
Since the Cash Flow Statement follows cash, it is considered the most difficult financial statement to fudge. As a result, many investors tend to rely upon it more than the other financial statements in order to determine the true performance of a business. If a business is consistently generating more cash than it is using, the business will be able to invest in its’ future or pay out cash to the owners. Both of which are good in the eyes of lenders and investors.