What Is a Cash Flow Analysis, and Why Is it Important to Your Business?
The cash flow statement is a very important tool for a business entity, utilized to measure the inflows of cash from operations and investments against the cash outlays. It should not be confused with an income statement. The income statement uses accrual accounting to measure income and expenses as they are incurred, not as they are paid. The income statement measures profitability, while the cash flow statement assesses an organization's liquidity. These are often very different measures. An entity may be very profitable and still be in the unenviable position of not having sufficient cash flow to meet current needs.
Cash flow statements are important financial tools for company planning of purchases and payments. One good idea is to divide the cash flows into those from operations, investment, and financing. These divisions allow the business entity to assess the cash flow from each area, project their expenses, and compare these to make sure the estimated cash inflow will be sufficient to meet cash expenses. It also permits projection of the amounts of liquid funds not needed for expenses, so that these may be invested or used for other purposes.
For example, if the interest on a major purchase would be higher than the potential amount gained by investing the same funds elsewhere, it might then be an excellent decision to pay cash for that asset. Idle funds in bank accounts could be shifted to investments with higher returns. Cash flow analysis is vital.
Analyzed together with the income statement and balance sheet, the cash flow statement can help you gain a more detailed, comprehensive picture of the financial state of the business entity. But these analyses are often complex, with many factors involved. To make sure that you have the most complete and current accounting information, the most comprehensive business analysis, contact the professionals at Legends Accounting.