Cash Flow Analysis

Written by Patricia Tunstall
Bookmark and Share

If a business is large enough to have at least one accountant on staff, it must rely on that person for financial advice and financial analysis. The accountant, or accounting department, takes care of property records, payroll, cash payments, purchases, inventory, and cash from sales and other sources. In larger companies, a treasurer or controller may assume these duties.

Although the income statement is probably the centerpiece of financial reporting to shareholders, the cash flow statement is equally important. The income statement from the accounting department ultimately reveals the bottom line, that is, net income, or, profit. The cash flow analysis breaks down the category into cash flow from operating activities, investing activities, and financial activities.

Managers Need Accurate Cash Flow Analysis

Proper financial statements would always distinguish between net income (profit) and cash balance. A business may have had net income of $1 million for the past year, but its cash balance did not necessarily reach that amount. Cash balance is outlined in the cash flow statement, under operating activities.

Any good business manager knows that profit is not the only measure of the financial condition of the company. The cash flow analysis gives a good picture of the inflow and outflow of money. If the company is having problems, the cash flow analysis enables the manager to discover where expenditures, for instance, are excessive. Corrections can then be made based on the statistical information.


Bookmark and Share