A cash flow statement is a financial document that tracks the inflows and outflows of cash within a business over a specific period. It provides insight into how a company generates and uses cash from its operating, investing, and financing activities. Unlike the income statement, which records revenues and expenses, the cash flow statement focuses solely on cash transactions.
The cash flow statement is crucial because it:
There are two methods to prepare a cash flow statement:
How is a cash flow statement different from a profit and loss statement?
The profit and loss statement (income statement) tracks revenue and expenses, showing profitability, while the cash flow statement focuses on actual cash inflows and outflows to assess liquidity and cash management.
Why is a cash flow statement essential for startups?
Startups often face tight cash constraints. A cash flow statement helps monitor liquidity, identify potential shortfalls, and build confidence among investors by showcasing effective cash management.
What does negative cash flow indicate?
Negative cash flow means a company spent more cash than it generated during a specific period. While this may be normal during early growth phases, sustained negative cash flow could indicate financial instability.
How can startups improve cash flow?
Startups can improve cash flow by: 1. Negotiating better payment terms with suppliers. 2. Accelerating customer payments. 3. Reducing unnecessary expenses. 4. Securing short-term funding when needed.
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