Importance of Cash Flow Statements for Small Businesses

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.

What is a business without money coming in and going out? Time after time, a majority of small and medium sized business owners have rated good cash flow management as the number one struggle they face. All business owners should have an understanding of the importance of cash flow as it can ultimately make or break their business. It is crucial to have cash flowing in the business and maintaining a proactive and disciplined approach to creating cash flow statements will give you a better understanding of your business’s cash position and how to best manage cash flows.

What is a cash flow statement?

A cash flow statement is all about... cash flow. It’s a summary of the amount of cash and equivalents that enter or leave the company. It shows how well the company manages its position of the classic greenback. An important part of financial reports, the cash flow statement can shed light on the company’s ability to generate cash to meet the business expenditures. 

Good cash flow management often looks like taking the necessary steps and putting in the effort to deeply understand the status and dynamics of the numbers of a business, then taking these insights and applying them to decision making. Cash flow statements can help immensely with the first half of this, and also provide important information that enables better business decisions.

There are three primary components of the cash flow statement - cash from operating activities which includes the cash used to support business activities, cash from investing activities, and cash from financing activities, including the cash used towards noncurrent assets. 

 What Can You Do With It?

1. Allows you to forecast your cash

Using a cash flow statement, you can make a cash forecast for future planning like how much raw material you can purchase or how much runway your business has in the case of unforeseen circumstances. It will allow you to understand the cash position and plan for the next period.

2. Aids decision making

The cash flow statement will allow you to make more efficient financial decisions like building a cash reserve, creating a comprehensive budget, and guiding the overall strategy and roadmap of the business.

3. Shows a clear cash position

Business owners need to be aware of the flow of cash and understand if there is a negative or positive cash flow. The statement gives a clear view of the cash positions and explains the reasons for a small or negative cash balance. It also allows you to compare the original forecast with the actual one to understand the inflow and outflow of cash. 

4. Helps prepare the budget

Several businesses prepare annual budgets and it can only be made when you are aware of the cash position. The budget is an estimate of the income and expenses for a particular period and the cash flow statement forms a basis for it.

With all these things in mind, it should stand out that cash flow statements are often a crucial and highly beneficial report to keep up current. If you need help with making your first cash flow statement or need a quick refresher on the process, check out small business loan company Credibly’s resource with examples here.

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.