Information Centre


The Importance of a Statement of Cash Flows

For a business to be successful it must have sufficient cash at all times. I'm sure you have heard of being asset rich and cash poor! Monitoring the flow of cash and your upcoming cash requirements helps to avoid that situation!

The historical cash flow statement identifies the cash that flowed in and out of the company. Your banker will appreciate being able to see at a glance all of your cash sources and where the cash has gone for the last year. A company that is consistently generating more cash than it is using will have more options available such as; paying dividends to shareholders, reducing debt, and investing or purchasing more inventory or inputs at a lower cost. A cash flow statement shows if a business is running out of money, even if it is profitable at the same time. Fast growing businesses often show a net income but have their cash tied up in accounts receivable or rely too much on bank financing. A cash flow statement can also show how much money owners are taking out of the business, if distributions to owners are large, it could cause the business to have insufficient cash flow to pay debt requirements.

Completing a cash flow projection for your business will help you make decisions to assist in maintaining adequate cash flow throughout the year. It also helps you improve and determine problems in your cash flow throughout the year. If you know that you will have sufficient cash you may be able to get a better deal on an asset or inputs. It is also beneficial to project cash flow for the next year so that you can make the best business decisions, for example if a piece of equipment breaks down, will you repair, rent or buy.

Knowing ahead of time that there is a period of the year that there will be a cash shortage, can help you take steps to prepare for it, such as ensuring you have adequate operating capital in place.

If this is an area of your business that you would like assistance with, we can help prepare projections or help you understand the cash flow statement included in your financial statement. Please don't hesitate to give us a call!