Cash Flow Statements and the Purpose Thereof
Written by Eddy Hood
Of all the financial reports a company generates, cash flow statements are among the most crucial and useful. As providers of outsourced accounting services, we at Ignite Spot work closely with all of our clients to help them understand their financial situation. We strive not only to keep track of the books efficiently, but also to help each entrepreneur further his or her business goals. When a business owner is just starting out, one of the first questions we seek to address is: "What is a cash flow statement?"
What is a Cash Flow Statement?
A cash flow statement provides a picture of where a company's cash has come from and where it is being spent over a set period of time. In other words, by looking at a cash flow statement, it is possible to understand the company's current cash holdings. The statement also offers a sense of where cash is generally going and where it is coming from.
Together with an income statement and a balance sheet, the cash flow statement is one of the three key elements of a company's financial reports. Since 1987, the Financial Accounting Standards Board (FASB) has required that businesses use the statement. Unlike an income statement, the cash flow statement does not include details such as depreciation. Therefore, it is often considered to give a more stripped-down and realistic picture of just how much cash is actually available to a company at any given moment.
Reading a Cash Flow Statement
Knowing how to read a cash flow statement is a valuable skill for any small business owner. In some cases, a small company may seem to be performing well, in terms of sales. However, if the cash flow statement reveals the company to be cash-poor, the business may be in a riskier position, after all. Since it offers such a stark picture of a business's current viability, one purpose of cash flow statement analysis is for business owners to keep tabs on their business's overall financial health.
Since a cash flow statement is intended to give a clear picture of current cash reserves, cash flow statement analysis is fairly straightforward. The statement divides all of its receipts and payments into three categories: cash from operations, cash from investing, and cash from financing. The first category includes operating costs such as merchandise or rent, as well as the company's income. The second category includes long-term assets that the business owner has invested in, such as property or equipment. The third category includes cash received from backers at the company's founding, including most long-term liabilities or equity
Ignite Spot Can Help
Knowing how to read a cash flow statement is just one step a business owner should take to take charge of the company's finances. Outsourcing the company's accounting and bookkeeping responsibilities to a team of experts is a great way to streamline and delegate tasks. However, that doesn't mean that business owners should stay in the dark. With our firm, it's easy to download key statements or refer to online materials to stay informed of your company's overall picture.