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Cash Is King

By on November 1, 2012

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What is a Cash Flow Statement?

A cash flow statement is a powerful tool for monitoring the health of a business. This statement is one of the three primary financial statements: the income statement, the balance sheet and the cash flow statement. Brilliant investors like Warren Buffet have said that the cash flow statement is the most important of the three because – as any business owner knows – cash is king. The purpose of the cash flow statement is to reconcile the change in cash balances from one period to the next by reconciling the inflows of cash and outflows of cash.

A cash flow statement covers activity over a period of time – typically monthly, quarterly or annually. All three of the financial statements are interdependent; changes in one affect the others. This is most apparent in the cash flow statement which typically begins with net income – pulled from the income statement – and includes changes in balance sheet accounts, such as change in current assets.

Importance of a Cash Flow Statement

The cash flow statement often groups the cash flows into three basic categories: operation activities, investing activities and financing activities. The key to understanding each section lies in their names. The section entitled “Cash Flow from Operations” includes any kind of revenue received from the sale of goods or services, payments made to employees, suppliers and the government – in short, the operations of the business.

Moving ahead, the investment section includes outlays for, and proceeds from, owned assets that are intended to garner returns in the future. For instance, purchasing new machinery would be labeled as a capital expenditure in the investment section of the cash flow statement.

If the investment section covers investments made by the business, the financing section of the statement summarizes investments made in the business. This section includes receipts from issuing or purchasing shares and the increase or reduction in debts.

A cash flow statement serves various purposes and is beneficial for multiple constituencies of a business. For a business owner, it can be a way of predicting the foreseeable cash flow for the near future and so can help in budgeting. For investors, the cash flow statement can help them assess the health level of a business as well as anticipating future investment needs.

 Keeping cash flowing is a challenge for most business owners.  Keeping up-to-date on the most successful cash flow strategies is a Horizon Bank specialization. Our advisors are experts in business financing and will work with you to develop a steady stream of solutions to help manage your cash flow.  Apply for a loan by speaking with a business advisor at 888-873-2640.

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