The cash flow statement is prepared on a cash basis, meaning based on the actual amounts of money received or paid out. This statement consists of three parts. Essentially, the results of these parts show us:
1. How much money has entered the company from operating activities?
2. How much money has come into or gone out of the company in connection with acquiring or disposing of fixed assets?
3. Cash movements related to borrowing or repaying loans.
Why is this statement so valuable? Because it contains revealing truth! Often, an entrepreneur thinks:
- "There’s money in the current account — we’re fine!"
- "The profit is high — we’re doing well!"
In reality, however, it might be that money has entered the account from sources other than business operations, or that the year ended with a profit but the money was frozen in fixed assets; fixed assets do not generate enough income, and the company may not be solvent. All this can be seen in the cash flow statement—and even more!
What other assessments can you make based on this incredible report?
– Can the company generate money from its core business at all?
– How has the company used its earned money?
– How is the company's activity financed?
– Are difficulties expected?
– Is the company capable of paying interest and dividends?
– How much money has entered (or left) from business operations, purchasing or selling fixed assets, or loan transactions?
– Can future forecasts be made?
Personally, I believe every entrepreneur should consider the cash flow statement as a “must-have” report. Just ask your accountant for this report at least once and review it together. I believe that the numbers might surprise you quite a bit. Just think about what you could do with this knowledge afterward! Exactly! You could start managing your numbers instead of just going with the flow. A great opportunity to start fresh in the new year! If needed, ask for help — we are here and happy to assist!
