A business’s most critical resource is cash

The cash flow statement (CFS) shows how changes in balance sheet accounts and income affect cash and cash equivalents. It excludes non-cash items like depreciation, bad debts, asset write offs, etc. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business.

In 1863, the Dowlais Iron Company had no cash to invest for a new blast furnace, despite having made a profit. To explain why there were no funds to invest, the manager made a new financial statement that was called a comparison balance sheet, which showed that the company was holding too much inventory (this is the genesis of to-days cash flow statement).

The benefits of a cash flow statement include:

  • Useful in determining the short-term viability of a company and its ability to pay bills.
  • Provides information on a business’s liquidity and solvency and its ability to change cash flows in future circumstances.
  • Provides additional information for evaluating changes in assets, liabilities and equity.
  • Improves the comparability of different businesses operating performance by eliminating the effects of different accounting methods.
  • Indicates the amount, timing and probability of future cash flows.

A business’s most critical resource is cash. The inability of a business to pay its debts as they fall due normally results in business failure. As such, using the cash flow statement as a tool to manage the business’s cash is critical.


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