For any business it is important to ensure
that:
- Sufficient profits are made to
finance the business activities.
- Sufficient cash funds are available
as and when needed.
We ascertain the amount of profits in a
profit and loss account. We also show
what the assets, capital and liabilities are
at a given date by drawing up a balance
sheet. Although the balance sheet shows the
cash balance at a give date, it does not
show us how we have used our cash funds
during the accounting period.
What we really need, to help throw some
light on to the cash situation, is some form
of statement which shows us exactly where
the cash has come from during the year, and
exactly what we have done with it. The
statement that fulfill these needs is called
a statement of cash flows or cash
flow statement.
Many people say that if we are making
profits then there should be no shortage of
cash. This is not true. In fact many
businesses fail and are wound up because of
cash shortages, despite adequate profits
being made. For example, a company has been
over-generous with credit terms to debtors,
and last year extended the time in which
debtors could pay from one months to three
months. In addition it has taken on quite a
few extra customers who are not creditworthy
and such sales may result in bad debts in
future. Statement of
cash flows can help to signal the
development of such problems.
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