Evaluating your Cash Flow Statement
The financial documents of your business should give information on how to run your organization. If you don’t know how to read the different sheets, you might want to take a basic accounting class to help you. The income statement shows your net income, while the balance sheet shows how much cash you have on hand. The cash flow statement is a detailed accounting of where the income comes from and where it’s going out to. This helps you understand and manage your day-to-day operations.
The cashflow statement has three sections:
• The money earned and spent on operations is the operating activities.
• Money that you spend on assets or earn on investments is appropriately called the investing activities.
• The third section is financing activities, which is money that is paid out to the owners or stockholders and funds received from or paid to financing sources.
What can you learn from the cash flow statement?
Your cashflow statement is like a thermometer for the health of your business. It can tell you if your business is attractive to lenders or investors. Investors what to see businesses that generate a lot of cash, while lenders want to know how your business is handling loan repayments.
The cashflow statement can also tell you if you have cash on hand that could be put to better use, either by purchasing equipment or investing the money into an interest-bearing account. You may also see that you have too much inventory and are wasting money having to store and maintain it.
The cashflow statement will also tell you if your customers are taking too long to pay your business. You may need to find ways to shorten the payment cycle to make sure your business has working capital when it needs it. On the other hand, you can conserve cash by waiting as long as possible, without incurring penalties, to pay your bills. It is a valuable part of your monthly documents that can help keep your business healthy.
