The cash flow statement, also known as the statement of cash flows, allows a business to stop in time and take a snapshot of the company’s ability to generate cash. Even thought the income statement is an important financial report to show profitability, it does not show a true picture of the company’s ability to generate ready cash. The statement of cash flows can be completed monthly, quarterly or yearly.
Understanding the Cash Flow Statement
Almost every small business sells a product or service that doesn’t generate immediate cash. The accounts receivable general ledger and subsidiary ledgers usually control sales that don’t generate immediate money. If a business has a large portion of its revenues in accounts receivables with a slow turnover rate, it could have a detrimental affect on cash flow.
Accounts payable also has an affect on a company’s ability to generate ready money. When the money comes due and a payment on account is made, it’ll have a negative affect on cash flow. If the purchase was for an asset, the actual transaction may not have an affect on profits, but will certainly have an affect on cash.
