Lack of working capital (cash gaps), a constant search for money to repay debts to suppliers, employees, budget, non-payment of buyers, or customers all lead to the fact that a company cannot manage its obligations. These issues increase accounts payable in record keeping (Klammer, 2018). The solution to working capital shortages is to comply with the general principles of money management. As a part of organizational reporting forms development, in an enterprise, several documents are usually modeled – one of them is a cash flow statement.
A cash flow statement constitutes a part of a body of reports that are crucial for a company. It serves several primary functions that help an enterprise avoid issues connected with maintaining a registry of money transactions. Outlining information concerning financial activities of a certain period, such as invoices, payments, and net changes in the capital is the primary data that a statement of cash aims to cover and helps to analyze (Klammer, 2018). Cash flow statements sustain a balance in a net amount of money that circulates and is transferred to and from a company. The main cash sources are determined in a statement of cash flow – they predominantly are of operating, financing, and investing character (Klammer, 2018). In this way, the document functions as a representation of the income and payment information of a company created during a specific period.
Cash flow is one of the determinants that demonstrate a company’s capacity to maintain its economic activities. Consequently, a statement of cash flow is a reflection of an enterprise’s financial health. It facilitates the analyses of the four principal enterprises’ health indicators: profitability, cost-efficacy, capacity to pay, and liquidity (Stice et al., 2017). As a statement of cash flow primarily demonstrates liquidity levels, calculating related ratios shown is a way to determine the financial status of a company (Klammer, 2018). Hence, a cash flow statement partially reveals a company’s financial status, whether it can continue its economic activities.
When evaluating a business to establish its performance and viability, a financial analyst needs to consider a number of essential indicators. Quantity and timing of revenues is a company’s principal source of liquid as it concerns revenue growth, concentration, and profitability. The state of expenses needs to be considered and determined whether the indicator stays the same or increases. The debt ratio should also remain below a certain level calculated individually (Prakash, 2016). Additionally, measuring operational efficiency is a way to ensure that an enterprise manages its resources accordingly. These points show essential information in regard to a company’s financial potential.
The Ford Motor Company’s annual report in 2012 revealed several slight changes in investing and operating activities. The first type of financial activity underwent a relative increase from the previous year, whereas the other activity decreased its cash flow (Ford Motor Company, 2012). The financial activity section signals a reduction in current liabilities that positively impacted the company’s revenue-producing capacity (Ford Motor Company, 2012). Overall, the annual report demonstrates a continual progression of the cash flow, which benefits the consistency in the company’s financial status and its general economic vitality.
To diagnose problems in time, an enterprise needs to develop a number of reports, one of which is a cash flow statement and use it systematically. The statement of cash flow allows a company to analyze the ability of an enterprise to generate cash inflows, as well as the direction of their expenditures to assess a company’s future needs. The document is an indispensable instrument for an analyst, as it performs several vital functions and helps to predict the future of an enterprise.
References
Ford Motor Company. 2012 Annual report. Annual reports. Web.
Klammer, T. (2018). Statement of cash flows: Preparation, presentation, and use. John Wiley & Sons.
Prakash, D. (2016). Evaluating a cash flow statement. International Journal of Business, Accounting, & Finance, 10(1), 22–42.
Stice, D., Stice, E. K., & Stice, J. D. (2017). Cash flow problems can kill profitable companies. SSRN, 1-20.