Question

Many small business owners focus on the cash balance in their bank accounts and may not use the statement of cash flows to analyze how their businesses are generating or using cash. Discuss what information is found on the statement of cash flows that is just as important as the bank balance (or more so) for the purpose of understanding the financial position of a company.

Answer 1

Statement of Cash flows: It is a schedule prepared to know the cash position of the organisation, from where the cash is coming and where the cash is going. It allows investors to know how a company's operation are running, to know whether the company is on solid financial footing or not. It tells how much cash is available to the company to fund the operating expenses of the company.

It comprises three components:

1- Cash from operating activities - This section provides knowledge about the cash generated or spent from the company's product or service or operating activities or business activities. Activities related to investment and finance is not included here.

2- Cash from Investing activities: This section tells how much cash is generated or spent on purchase or sale of long-term assets or investments.

3- Cash from Financing activities: This section tells how much cash is obtained from issue of securities or taking loans to finance the business and how much cash is spent on their cost.

It is clear from the above information that statement of cash flows is more detailed analysis of cash instead of analysis of bank account as bank account balance tells how much cash you have not how that cash was generated or spent, on what cash is spent, how much cash is available to cover the operating costs and financial costs of the company.

Information available in statement in cash flows is as much important as in the bank account.