A cash flow statement indicates the methodology and frequency with which an organization receives funds from different sources of income such as sales, financing and investment. Additionally, this statement equally explains how the organization is using its funds, whether for expenses, interest payments or capital investments among others (Krishnan & Largay III, 2000). This paper speaks on the importance of a cash flow in the operation of a business.
An important benefit of the cash flow for the operation of the business is accountability. Being able to consider the expenses of the company ensures that there is transparency in company operations through the accounting of various funds obtained by the company. Here, stakeholders can be assured that their investment in the company is being prudently used. Furthermore, cash flows are important for the determination of organizational financial efficiency. Performance measurements can be obtained using values gotten from the cash flow statements. As a result, cash flow accounting becomes necessary for adequate financial planning within the company (Finger, 1994).
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A manager could benefit from the statement of the cash flow when planning for future company ventures such as research and development as well as expansion, since they are aware of the financial expectation on the company for such plans. Non-cash activities whose references are made in the notes must be considered aside from financial obligations since they are non-monetary contributions to the organization. These could be in the form of equipment and other assets.
In conclusion, considering both the financial and non-monetary aspects of the organization is good for future planning and effective financial management. Cash flow statements aid the organization to provide adequate information on the sourcing and spending of cash to facilitate ease of planning.
References
Finger, C. A. (1994). The ability of earnings to predict future earnings and cash flow. Journal of accounting research , 210-223.
Krishnan, G. V., & Largay III, J. A. (2000). The predictive ability of direct method cash flow information. Journal of Business Finance & Accounting, 27(1‐2) , 215-245.
