Cash flow is basically the net amount of cash equivalents and cash that are moving in and out of your business. If there is a positive cash flow, that signifies that the company is a liquid asset, re-investing in the business, enabling to settle debts, paying expenses, returning money to shareholders, and providing a buffer against future financial challenges.
On the contrary, a negative cash flow highlights that the assets of the company are decreasing. Additionally, the net cash flow is determined from net income including accounts receivable and other items due to which payment has not yet been received. Required for assessing the quality of the company’s income and determining its liquidity, a statement of cash flow determines if the company is solvent or not.
A cash flow statement, abbreviated as CFS, is one of the main financial statements out of three (the other two being the income statement and balance sheet) to gauge a business’s financial strength. When the cash flow is strong, it signifies that a company is in a good position to expand the business. Also, the business has an open door for all opportunities and can also invest in new projects. These financial statements are helpful to show the constant inflow and outflow of cash.
Business entities must maintain a sufficient balance of cash at all times as this practice enables them to meet different types of needs and requirements of the business. However, the cash outflow and inflow must be maintained properly. The ultimate reason to prepare the statement of cash flow is to ascertain the changes in the cash position of the business entity. By enabling the financial policies and evaluating the cash position, a statement of cash flow helps in managing the business.
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