Importance of the Statement of Cash Flow
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Importance of the Statement of Cash Flow
Imagine that your income was insufficient to pay your bills. Your creditors would not be happy when they found out. The same is also true for corporations. Corporate creditors, however, are able to monitor a firm’s ability to meet its obligations through its statement of cash flow. Investors can use this report as an aid in determining the financial well-being of a firm.
Things To Know
- The statement of cash flow can be used to predict future cash flow.
Why cash flow matters
Firms with poor cash flow may have difficulty making interest payments, loan installments, and dividend payments. The statement of cash flow can also be used to predict future cash flow. This is very important to those investors or creditors who are considering buying stock or lending money to the firm.
Why the breakdown of cash flow matters
Additionally, the statement of cash flow is separated into three sections: operating activities, investing activities, and financing activities. This breakdown allows investors to see the sources and uses of a company’s cash. Generally, a solid firm should be able to generate more cash from its operating activities than it spends. Any firm that cannot must borrow or raise capital by other means to cover its operating expenses, meet its debt obligations, and pay dividends.
