Understanding the Statement of Cash Flows
Cash flow is one of the most important long-term indicators for the overall financial health of a business. For a business to enjoy long-term success, sufficient cash must always be on-hand to accomplish various things including paying worker salaries, resolving immediate debts, and paying the company’s normal operating costs. Businesses also need cash on-hand to pay for expenses, repay bank loans, pay taxes, and to purchase new assets to fuel the company’s future growth. A company’s cash flow is documented in their cash flow statement. The cash flow statement, which is also known as a statement of cash flows, is a financial document that summarizes the amount of both cash and cash equivalents entering and exiting a company during a given time period. The cash flow report provides useful context for both a company’s balance sheet and income statement and has been a mandatory part of all corporate financial reports since 1987. The cash flow report is important because it informs investors, creditors, company owners, and other interested parties of the business cash position of the company and can act as a strong indicator of a company’s overall financial health.