You can tell a lot about a business just by looking at its cash flow statement. It’s what, you ask?
In the simplest terms, a cash flow statement is a document that details the monies flowing into a company as well as out for any given period, be it a month, months, or even a year. The more frequent the statement the more accurate. And it also reveals a lot about the business and its state of affairs.
There are three types of cash flows that can be calculated:
Operational – this is calculated as the money received or paid out for the company’s core business activities.
Investment – this includes money received from selling assets or spent buying assets or investments.
Financing – this will contain information about money received from the issuing of debt or expended in the form of dividends or debt repayments.
Cash flow statement are usually drawn up at the end of the financial year and form part of the company’s annual financial statements, but they can also be drawn up for special meetings where business policies are to be discussed or when the business is being sold. These documents will show prospective buyers how the enterprise has been performing for the period and they will be able to see if it is a sound investment or a money-swallowing hole. The biggest problems with cash flow statements for companies that find themselves on the market is that there are a lot of clever business people and accountants out there. By “clever”, we mean “shrewd, devious, unscrupulous people who will manipulate the documents to give a false representation of the current financial performance of a business”. You need to be very careful when looking at the cash flow statements because they are not immune from manipulation and you could find yourself being conned.
If you’re looking at true financial representations of the business, you can easily see areas that need to be adapted and changed to perform better. If your money paid out on business does not have a proportional return via money flowing back in that you are happy with, you can then rethink policies and business structures in place and alter them to work better for you.
Cash flow statements tell you how your company is doing when it comes to making and spending money. While it’s a good indicator, you need to remember that it is only one tool – there are many others that need to be considered before making any hasty decisions.
