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A cash flow statement offers insights on spending (and thus on your actual cash usage) that do not always show up in a profit and loss statement or balance sheet. Payments towards a loan taken, for instance, are captured only in the cash flow statement. You will need these details to get a true picture of your financial health as a business.
At any point in time, a business needs sufficient cash reserves to make payments, repay loans, meet unexpected expenses and generally maintain solvency. For this reason, cash planning at regular intervals is vital.
The cash flow statement assesses that plan, allowing the business to compare actual cash patterns with projected ones and thus improve their planning next time.
If the depreciation on an asset turns out to be higher than anticipated, for instance, the business can set aside a higher cash budget for it next month.
Comprehensive data on cash inflow and outflow allows the business to identify ways to increase its cash reserves. For instance, if they see that inventory maintenance is consuming a lot of cash, they could decide to use their inventory smartly to collect receivables sooner, thus boosting cash inflow.
Having enough cash in reserve is essential, but too much idle cash is not good either. Hire an accountant for your small business to see how you can best invest your money.
Cash flow statements can help identify whether there is the potential to invest excess cash in other business activities, like buying new assets or putting more into product R&D.
Conversely, if the statements indicate a cash deficit, it may signal the need to borrow more money for an optimum cash balance.