Are you keen to keep a tab on your company’s financial health? For the same reason, most businesses hire accountants to prepare financial statements. These financial statements are crucial for entrepreneurs and investors to understand the profitability of a company and make well-informed business decisions. There are four types of financial documents used by businesses. These are as follows:
- Profit and Loss statement
- Balance Sheet
- Cash Flow Statement
- Statement of Changes in Equity
In this blog, let’s know the valuable insights that you can derive from your cash flow statement and balance sheet.
Cash Flow Statement-The Movement of Money
In a business, multiple activities go on simultaneously, such as sales, investments, payments to vendors, revenue collection, and so on. In short, there is continual inflow and outflow of cash in a business.
Ideally, every entrepreneur wants a positive cash flow, but negative cash flow can also occur due to operating losses, large capital expenditures, economic recessions, and many other factors.
So, if you can comprehend the meaning of your cash flow statement, it will help you to manage your cash resources more effectively. This will ensure your company’s financial stability. A cash flow statement usually contains these three segments.
Cash flow from operations (CFO)
Operational activities are always a source of cash generation due to the sale of products, payment to employees, etc. However, there is also cash expense because of the purchase of raw materials, advertising, product shipment, etc. So, CFO represents the total amount of cash generated and used due to the operational activities over a specific period.
Cash flow from financial activities (CFF)
This crucial segment of the cash flow statement gives information about the cash inflows and cash outflows related to financial activities such as debt repayment, issuing company shares, dividend payments, interest on loans, and so on.
Cash flow from investment (CFI)
There can be multiple investing activities in a business, such as the purchase of buildings, vehicles, machinery or the sale of all these. There can be the purchase of stocks and other securities or the sale of these investments too. So, this segment is all about the cash flow from investing activities.
Key insights from the cash flow statement
Now, by analysing all three segments of the cash flow statement, you can develop a clear and concise understanding of the cash-generating capacity of your company. This helps to evaluate your company’s ability to meet its financial obligations and whether the overall financial strategy needs a change. You will have valuable insights about the growth prospects of your company, which in turn will help you immensely in making informed decisions to ensure your company achieve and maintains sound financial health.
Unlocking the Balance Sheet
A balance sheet provides valuable information about a company’s current assets and long-term assets. While current assets mean short-term investments, cash equivalents, or accounts receivable, long-term assets imply property, intangible assets, and long–term investments. It also offers insight into your company’s liabilities. Of these liabilities, some will be expected to get settled soon, but many may be long-term obligations like deferred tax liabilities, lease obligations, etc. Analysing all these will give you crucial information about your company’s financial obligations and how well it is meeting these.
In short, you can understand a lot if you know how to read your cash flow statement and balance sheet. You will feel not only empowered to take the right decisions and identify the areas that are not letting your company achieve sound financial health. Monitor these two financial documents regularly to navigate all the business challenges successfully. However, if it is not your cup of tea, or you have no time to indulge in all these, you can hire an experienced accountant from a reputed accounting firm. An accountant can help you immensely with his knowledge and expertise.