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How Does Cash Flow Help in Decision Making?

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Last editedOct 20212 min read

No business is sustainable without a healthy cash flow. The cash flow statement offers an at-a-glance overview of where your business stands with its operating, financing, and investment activities. How does cash flow help the management in decision making? Here are a few areas to focus your attention more carefully.

What does the cash flow statement show you?

To better understand the importance of cash flow statements, it’s first helpful to look at what this document shows. A cash flow statement is broken down into three parts:

  1. Operating activities – Includes cash inflows such as revenue and dividends as well as outflows such as taxes, supplier payments, and overhead costs

  2. Financial activities – Includes any capital that’s been raised outside of your business operations, such as borrowed money and security sales

  3. Investing activities – Shows gains and losses from loan payments and buying or selling assets related to the business

Essentially, the cash flow statement breaks down all the various streams of cash flowing in and out of your business, so you can see exactly where your money is going.

Why cash flow analysis is important

There are certain aspects to a business’s financial health that may not be apparent on the balance sheet. For example, you might show an outstanding year in terms of sales profit. However, if your invoices haven’t been paid on time it could mean that you don’t have sufficient cash on hand to fund growth. A profit and loss statement won’t reflect extending credit or purchasing inventory, both of which use cash reserves.

The usefulness of cash flow analysis relates to its comprehensive nature; you can pinpoint where your money’s coming from and when. The cash flow statement helps identify trends you may not see otherwise. At the same time, you can focus on finding fresh ways to improve your cash flow beyond sales alone. Chasing up on overdue invoices generates cash, as does cutting inventory costs.

How does cash flow help the management in decision making?

Successful financial management involves constant tracking and analysis of key performance indicators, including cash flow. You simply can’t grow without cash. Generating new sales leads, purchasing inventory, developing products, and purchasing equipment all requires a positive cash flow. This is why it’s so important to understand the state of play as reflected on your cash flow statement.

The usefulness of cash flow analysis is reflected in major management decisions like the following:

  • How will we fund this year’s growth?

  • Are we able to grant credit to vendors?

  • Can we purchase new machinery in cash?

  • Are we able to pay off debts faster?

  • Do we have a cash surplus for reinvestment?

Tips for making the most of your cash flow

Now that we’ve covered just why cash flow analysis is important, here’s how you can use it to your best advantage.

  • Use cash flow as a basis for your budgeting. With projected cash flow statements, you’ll be able to see areas where you are potentially overspending, allowing you to cut operating expenses without sacrificing revenue. Create a more tailored budget to your business’s daily operations and needs.

  • Determine how you will fund business expansion in the short and long term. Analyzing the cash flow statement gives you a more accurate idea of whether you have sufficient cash to invest in new business activities, or if you will need to find outside sources of financing instead. At the same time, your cash flow statement is a useful document to help you obtain credit from financiers.

  • Make the auditing process run more smoothly with detailed, accurate records of all cash inflows and outflows. Be sure to streamline your accounting processes with automation so that you have the best possible picture of business activities. This will ease the admin headache when taxes are due.

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