Reasons why your cash flow statement matters

A cash flow statement is what captures the details of how a business is earning and spending its cash. If that were not enough reason to have one for your own business, investors almost always ask to see cash flow statements in addition to balance sheets and P&L statements before funding you – an essential factor to consider whether or not you decide to seek funding.

Positive cash flow indicates proficiency with collecting receivables and making payments on time – which speaks to your trustworthiness as a business and encourages investors and lenders to work with you.

It also ensures that you have enough cash on hand for unforeseen situations so that business can always continue. So whether you are preparing for your next round of VC funding or simply looking to make smarter business decisions, a cash flow statement is indispensable. Here are some concrete benefits of regularly preparing and studying your cash flow statements:

1. Insights into spending activities

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.

2. Informed purchase decisions

Any business will need to upgrade its assets or invest in production or marketing from time to time. But with a cash flow statement, you can see whether you can actually afford such an expense at this point in time.

For instance, if the statements show that you do not have enough cash for a new machine, you can take a loan for it or rework your production schedule so that you do not need the machine until a later date when you have more cash.

3. Improved cash planning

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.

4. Ability to increase cash inflow

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.

5. Better working capital balance

Working capital is essentially the readily available cash that a business uses to cover its day-to-day costs. In addition to unearthing ways to enhance cash inflow, a cash flow statement can suggest ways to optimise working capital usage.

For instance, the business could increase the timeline for paying bills to keep cash in the account for longer. However, this should only be done after duly informing the relevant creditors so there is no clash in expectations.

6. Boosting cash without counting too much on profits

Many businesses focus solely on their profit and loss statement when it comes to improving cash reserves, But while profits are a prominent and vital source of cash, they are not the only source – plus, not all profits are in cash form anyway.

As we have discussed above, inventory efficiency and quicker collection of receivables also serve to boost cash and are easier to implement than increasing profit, which is contingent on many external factors.

7. Determining optimum cash balance level

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.

8. Long-term planning

Cash flow statements are not just for short-term tweaks. Over time, cash inflow and outflow patterns can help the business identify specific areas to prioritise for long-term financial health.

For instance, if certain vendors consistently delay their payments, the business could decide to switch over to other vendors or implement more stringent payment terms. Or, the company could evaluate its position regarding long-term debt repayment based on projected cash flows.

9. Avoiding crises

Another way cash flow statements help with long-term business planning is by guarding against cash shortages in advance.

Suppose the cash flow patterns indicate a cash crisis in the near future. In that case, the business can either modify its activities to prevent it from happening or build an extra cash reserve in case it becomes necessary.

And it goes without saying, investors are much likelier to fund businesses that have a track record of staying solvent.

Over to you

We hope this motivates you to invest more time into cash flow planning and strategising. Take a close look at all the channels your cash is coming from – operations, investment and finance – and work with your team to identify areas for improvement.

The more optimised your cash flow statements are, the more you will impress potential investors, and the likelier you will be to attract the funds you need to take your business to the next level.

Do not make money problems cause you to resent your business. Cash is what makes or breaks a business. Unfortunately, we at Golding have seen companies with the best ideas and intentions fail only because they had cash flow problems.

Fret not – we use the best tech to nail accounting basics, giving you a clear overview of where you stand with your money and how you can optimally use it. Book yourself a no-obligation, free consultation with us by filling out the contact form. Let us help you grow your business!