What is a Cash Flow statement? What is it for?

The Balance Sheet is a historical view of your company’s financial standing up to a certain date and the Income Statement shows what revenue there was, what costs and expenses were paid and what your bottom line is.

But, what about cash? How much cash does your company have available?

If your answer is, “I just look my bank statement”, be careful, you may get a big surprise.

Let’s see why…


What is a Cash Flow Statement?

To begin it is important to clarify a few points, such as:

  • Your net profit does not necessarily tell you how much cash your business has; and
  • Your bank statements or balance sheet won’t tell you this either.

No, none of the aforementioned can help you with knowing how much cash there is available in your business. The only statement that can tell you this critical information is your Cash Flow Statement.


Why do I even need to know how much cash is available?

It is important to be able to know how much cash is available because if not then even though your business is profitable, it may not be able to pay its obligations, yes – a profitable business can quickly run out of money. How so?


Well consider this:

Company A has a net profit on its income statement of $ 1 million, that’s no small amount of money, but there is a problem. By the end of this week Company A needs to repay $500,000 of one of its loans and its two main clients between themselves owe $750,000 but will not be able to pay their bill until next month. Additionally, Company A only has $300,000 in its bank accounts. What does this mean?


Simply put, it means that with only $300,000 in the bank Company A will fall considerably short of being able to make its loan payment. This goes without deducting any other costs or expenses, such as rent, employees, utilities and so forth that may be needed to be paid between today and the due date of the loan payment.

A Cash Flow Statement would have been beneficial to Company A, since it would have permitted the company to better manage their cash beforehand and avoid defaulting on a loan payment. Additionally, Company A could have saved money on financing costs due to late payment penalties that they will now need to pay.


What can a Cash-Flow Statement do for me?

Well we have seen that a Cash-Flow Statement can help you better manage cash so that when you need to, let’s say, make a loan payment, there is enough to cover the amount due.

But that is not the only thing that a Cash-Flow Statement is good for.

A Cash-Flow Statement can also help you to decide whether or not to invest in a possible venture, have a clearer idea of how cash flows in and out of your company, determine whether your business is generating sufficient liquidity and even whether or not there is sufficient cash to cover debt and interest expenses.

Therefore, it is important as a business owner for you to take the time and take a look at exactly what your Cash-Flow Statement looks like today so you have greater clarity of your finances and the direction you want to take your business in.

As your go to accounting services firm in Nicaragua, we at SAENICSA would be glad to help you with working on a Cash Flow Statement for your business, just contact us HERE.

Leave a Reply