A continuous cash flow is essential for any business, regardless of its size. A cash flow statement is an important tool for managers to have at their disposal to evaluate the financial position of the business.
Numerous businesses end up failing because they grow too quickly. There cash flow is outweighed by their debt obligations. For small businesses, cash flow is equivalent to income. This is because often all of the cash receipts come from sales and the payments simply go to current expenses.
But this is not always the case. For businesses that don’t just run on a cash basis, an accountant compiles a statement of cash flows from the statement of income and the balance sheet. It is sometimes divided into categories such as operating, investing and financing.
Operating enterprises generate income which is revenues minus expenses. But the cash flows that result differ from income for two distinct reasons.
Investing enterprises are comprised of long-term asset transactions. On the other hand, financing enterprises involve borrowing and ownership. The portions of the balance sheet such as short-term borrowings and long-term debt and ownership are used to reflect this section on the cash flow statement.