A cash flow statement is a financial statement that provides information about the cash inflows and outflows of a business over a specific period of time. Here are the uses of a cash flow statement:
Liquidity Analysis
Cash flow statements help assess a company’s liquidity by showing the sources and uses of cash. Positive cash flow indicates that a company has enough cash to meet its short-term obligations, while negative cash flow may suggest potential liquidity problems.
Budgeting and Planning
Businesses use cash flow statements as a tool for budgeting and financial planning. By understanding the timing and amount of cash inflows and outflows, companies can make informed decisions about expenditures, investments and financing to ensure they have sufficient cash to operate effectively.
Investment Decision-Making
Investors analyze cash flow statements to make informed investment decisions. Positive cash flow can be an indicator of a healthy and sustainable business, while negative cash flow may raise concerns. Investors also examine the cash flow to assess the company’s ability to pay dividends or fund future expansion.
Creditworthiness Evaluation
Lenders and creditors use cash flow statements to assess a borrower’s ability to repay loans. A positive cash flow indicates that a company has the capacity to meet its debt obligations while negative cash flow may raise concerns about the ability to service debt.
Overall, the cash flow statement provides valuable insights into a company’s ability to generate cash, manage its operations, and meet financial obligations, making it a crucial tool for financial analysis and decision-making.