- On June 19, 2020
Wondering if you need a cash flow statement for your small business? Of course! Without it, you won’t have a clear picture of how much money is moving in and out of your business, which may cause you to make poor financial and management decisions.
If you want to remain well-informed about the financial state of your business, a cash flow statement is a must. Still not convinced? Here are three other reasons you need a cash flow statement for your small business:
1. Cash Flow Statements Determine Your Short-Term Viability
Do you want investors to look at you and say, “I want to invest in this company”? If so, then don’t disregard the importance of a cash flow statement. Investors are always looking to invest in companies that have a handle on their short-term viability, specifically their ability to generate cash and pay off any debts.
Healthy cash flow can indicate to investors and yourself how quickly your company is growing. For instance, if the cash flow statement shows that you’re generating a lot more money than what you spend in terms of paying off debts, spending money on supplies, covering costs, and so on, that’s a good sign you are or can expand. This is big news for investors, as this can also mean that your dividends can increase.
2. Cash Flow Statements Paint a Realistic Picture Of Your Company’s Financial Health
While you might have a profit and loss statement or a cash flow forecast, none of these will give you the information you need to know your financial position, much like how cash flow can. For instance, the P&L statement will only indicate revenues and expenses when they happen. However, it does not show whether the money has been exchanged. This can lead to an inaccurate picture of your business’ finances.
You will need a cash flow statement to know how you are doing money-wise. This is because it provides information that has happened, such as how much money you have generated without including any of the other things that have yet to occur.
3. Cash Flow Statements Indicate How Your Money Is Earned And Spent
Your business makes and spends money in a variety of ways. Cash is constantly flowing in and out of your company’s bank account and it’s only wise to know where every dollar is going. A cash flow statement will help indicate precisely where the money is coming from and going by separating the numbers into three general areas: operating activities, financing activities, and investment activities.
Money earned from sources like sales and contracts fall under the operating activities category, as will the money spent on the operational expenses. Financing activities include the likes of debts and equity. Investment activities, on the other hand, comprise of activities such as buying and depreciating assets and other investments.
A cash flow statement will show precisely how you are doing as a business, how much money is going in and going out, and how much money you have left to spend. This will allow you to make more well-informed decisions to help you build and grow your company, allowing you to earn more revenue and expand! If you have not started using a cash flow statement yet, start doing so as soon as possible.
Are you looking for business accountants in Melbourne to help with your cash flow statements? We at Think Wiser can help you with all your accounting needs, including your cash flow statements. Reach out to us today.