Any business organisation has three main financial statements which allows them to track the finances of the company. While the majority of people know about balance sheets and the income statement, not a lot of people know about cash flow statements and here in the article, we will make sure that you have all the information that you need about a cash flow statement and the way it is read.
This will make sure that you are always prepared regarding the finances of your company and how you can improve them.
Introduction to a Cash Flow Statement (CFS)
Any company needs a proper statement tracking the inflow and outflow of cash and a cash flow statement is used for the same. This provides valuable insights into the financial health and operational efficiency of an organisation.
The cash flow statement of a company is used to manage the cash position as this tells the institutions about the cash it is generating and how much they have during one particular period. There are three main components of this statement - operating activities, investing activities and financial activities as all of these ensure that a company knows how much cash they have with them.
The Crucial Role of Cash Flow Statements
Since there are many people who are not sure about the cash flow statement, we are also going to tell you about the importance of a cash flow statement.
This statement is used to determine how the operations of a company are running including how much money is being spent and where the money is coming from. The CFS assists creditors in assessing the amount of cash (known as liquidity) that a company has available to cover its operating expenses and settle its debts.
The CFS is also crucial for investors as it indicates whether a company is in a strong financial position. This statement is often used by investors to determine whether they should invest in the company or not.
Discovering the key components included a cash flow statement
To know about cash flow statements deeply, you should also be familiar with what do you add back in to cash flow statement. There are different components of a cash flow statement, so take a look at the same.
Operating activities
The operating activities include the cash that is generated from business activities which means that a company’s products and services contribute to operating services. The receipts from sales, interest payments, income tax payments, rent payments and a number of other things make operating activities.
Investing Activities
The cash flow of investing activities refers to any cash that is used for investments for the business. Purchase and sale of assets or loans made to vendors comprise investing activities. The loans received from customers also fall in the same category.
Financing Activities
The third important component of a cash flow statement is the cash used in financing activities which is the cash received from investors or the bank. It also includes the cash that is paid to shareholders of the company. Other factors that are used are dividends, stock repurchases and debt payments.
Seeing a financial statement example will allow you to learn more about a cash flow statement as it will provide you with actual details of a company and how a cash flow statement is created.
