Cash flow statements are important for your company’s routine. Learn how to read this information strategically!
One’s ability to keep track of the financial indicators of a company provides a better means of decision-making and accelerates its growth. In this respect, an effective interpretation of cash flow statements helps in achieving these results.
This is one of the strategies that enable managers to achieve maximum efficiency in the operation of resources in the cash inflow of the company. However, knowing how to read through these numbers to develop coherent financial planning can be challenging.
All that in mind, you will find out below what your cash flow statements are, what they’re used for and how to read them. Keep reading!
What is cash flow?
Corporate finances play a significant role in a business’s everyday operations. All things considered, it is the efficient management of resources that makes it possible for the organization’s leaders to grasp the financial position and make effective decisions.
In this sense, cash flow is one of the most significant ways of controlling a company’s capital. It consists of monitoring the money that comes in and goes out of the cash register. Thus, the practice enables a clear understanding of financial health and allows for better projections.
What are cash flow statements?
Now that you are reminded of the principle of cash flow, you also need to know what cash flow statements are. They are also referred to by the abbreviation DFC. They are accounting reports which compile all the numbers concerning capital inflows and outflows.
In this manner, cash flow statements give a more general overview of the company’s position over the provided period. This is because the document contains information on all transactions.
Not withstanding, not to confuse between DFC and the income statement (DRE) . However, in the company, they play slightly different roles while preparing the firm’s financial statement.
While the DFC relates to actual cash inflows and outflows, the DRE is a summary of financial transactions — which may not have an effect on cash flow. Therefore, it is carried out in conjunction with the balance sheet.
How is the DFC composed?
To structure your company’s cash flow statement, you need to organize the document into three groups of activities. They are:
- operational;
- investment;
- of financing.
Operational activities are those that are related to the company’s income generation. This group includes, for example, accounts payable and receivable. In addition, the information is linked to the organization’s working capital.
Investment activities refer to the movements that the company made with the aim of achieving profits. This segment should include financial investments and asset negotiations, such as real estate. Generally, they are related to the non-current capital of the business.
Finally, financing activities refer to the organization’s fundraising strategies — such as loans and financing. Therefore, it is necessary to include capital inflows and outflows for this purpose.
What are cash flow statements for?
As you have seen, cash flow statements include three important groups of activities for a company’s routine. Therefore, they are important for corporate management strategy.
Learn more about its functions!
Control inputs and outputs
Cash flow is an essential task for the company’s day-to-day activities. This is because efficient management helps managers have a clear view of the reality and financial health of the company.
In view of this, the statements serve to ensure an even broader view of the numbers. This way, it will be easier to understand the company’s results in a given period and the reasons that led to achieving them.
Facilitate decision making
The DFC is also an important accounting document for decision-making. After all, by clearly visualizing the organization’s numbers, managers will be able to make decisions based on data — which is positive for the strategy.
Maintain smooth operation
In addition to being a relevant document for planning, producing a cash flow statement is an obligation for companies in many scenarios. According to Law No. 11,638/2007 , publicly traded companies must present this information quarterly.
How to read your cash flow statements?
Now that you know the main characteristics of cash flow statements, you need to understand how to interpret this information. This way, you will be able to use it to make decisions.
Firstly, the document allows you to compare your company’s cash movements over a given period. This way, there are chances of identifying possible seasonality and other factors that contributed to differences between the numbers over the months.
The DFC also helps managers better identify the costs that led to capital outflows. This creates opportunities to design reduction strategies , if necessary.
Another way to read cash flow information is to establish financial indicators. Through them, you will be able to understand whether the results were in line with the planning or fell short of expectations.
Therefore, cash flow statements should be part of the definition of planning and decision-making. Furthermore, it is interesting to use it in conjunction with other accounting statements — such as the DRE itself.
Finally, ideally, the results demonstrated by the DFC should be positive. Otherwise, they may indicate poor company performance — which requires the rapid definition of solutions to overcome the situation.
As you have seen, cash flow statements are important for the company’s routine. After all, in addition to being mandatory for many organizations, they facilitate decision-making. Therefore, it is essential to know how to read this data effectively.