Businesses should put equal importance in managing cash flow effectively as well as making profit. This is because profit can only turn into cash if your customers pay and profit can also turn into bad debts if your customers failed to pay and this equal to loss of cash to your business.
Cash is not the same as profit, a point that is sometimes overlooked. It is therefore very important that companies to prepare cash flow statements to monitor the cash movements. Cash flow statement is required in every company’s statutory accounts except for small companies which are normally not required to have one in their company accounts by law.
The advantage of the cash flow statement is to spotlight the increase or decrease in cash between two balance sheet dates, it gives the total for the movement and shows how an adverse movement has been financed or a positive movement applied. It also shows in detail the various factors that have contributed to the movement.
Cash flow movement can be from the following reasons:
- The company is owed less money at the date of the latest balance sheet.
- Perhaps the company has been more efficient at collecting its debts or
- Perhaps it has started offering discounts for prompt payment
- Perhaps trade is down and there are fewer debts to collect.
- Perhaps the workforce has been on strike and there have been no deliveries to customers in the month leading up to the second balance sheet date.
- Perhaps last year's business was bad and this year's business is good.
Payment of dividends or purchase of fixed assets for the business will decrease the cash in the business. It is very important to be able to manage your cash within the business so that the business activities can be sufficiently funded without excessive borrowings.
Many potential investors and bankers pay great attention to the cash flow statement especially if they believe the company may be short of working capital. In short, healthy cash flow is good for the business and also any other parties with intend to invest.
Concise Accountancy – Cash is real and profit is notional until it is realized.