A cash flow statement can help you focus on creating excess cash.
Having profits is important. Profits are one of the things that help create cash. There are other things that can also help you create cash. If you can pay less for capital equipment you need you are creating cash while spending money. If you can collect receivables from your customers faster you are creating cash. If you use inventory more efficiently you create cash. Concentrating only on your profit and loss statement makes it difficult to focus on cash.
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2. Cash flow statements often provide better KPI’s (Key Performance Indicators) than profit and loss statements. I believe developing excess cash is a great KPI. This is an activity that literally every area of your company can get involved in through individual drivers.
Knowing what needs to move the needle on profits is only part of the story. Companies that concentrate on creating excess cash often also create better enterprise value than those companies that only concentrate on profits. 3. Cash flow statements help with financing decisions. Buying capital equipment uses cash. Growing capacity in your company uses cash. Adding inventory uses cash. Adding customers uses cash.
Understanding where your cash goes and how you will provide more cash when you need it are key parts of running a successful company. Don’t be like me and run out of cash without knowing why. Understanding your cash flow statement will allow you to make better decisions about your business.