Need for Cash Flow Statement
Yes, the writer agrees with the above statement that cash flow statements are important for any organisation.
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Cash is needed for a variety of reasons in garment organizations primarily for:
- Payment for purchase of garments raw materials
- Wages and salaries to workers and staff
- Purchase of garment accessories for production
- Upkeep of assets including sewing machines, iron boards, dryers, etc
- Factoring, has been mainly the domain of the garment industry for recovering funds from debtors (BNET 2008: Factors keep factories rolling in garment industry :
Provides detailed day-to-day information
The Cash flow statement is prepared on a daily basis, to record the receipts and disbursements of funds for the enterprise. On the one hand, the cash flow records the sources from which cash funds are received and on the other, it depicts how these funds have been expended and what is the cash balance available on a particular day and date. The financial statements- i.e. in terms of profit and loss account and balance sheet only considers the consolidated position as on a particular date of the Balance Sheet whereas cash flow depicts incomes and outflows on a regular and daily basis. From the Balance Sheet, the cash inflows and outflows on a particular date cannot be gained, but this could be gained from Cash flow statement.
Coming to the case of garment industry, it is seen that it needs to be assured that cash is available for company’s business. If the Owner/Director indiscriminately used funds, there would be no funds left for meeting Garment trading business expenses, which could spell embarrassment for the Company. “For years, financing in the garment industry has been as rough and tumble a game as you’re likely to get in the business world.” (Wachovia 2008: Borrowing against receivables to improve cash flows: http://www.wachovia.com/small_biz/page/0,,447_972_1694_1834_1940,00.html
Again, a perusal of the cash flow would tell us what were the cash received from sales and cash paid for purchases; thereby it would be possible to control debtors and creditors.
Therefore, it could be said that while balance sheets and profit and loss accounts provide consolidated figures for quarterly, half yearly or annual periods, the cash flow provide detailed cash inflow and outflows for specific periods.
Controversies surrounding cash flow statements
There are some controversies regarding published cash flow statements due to the following:
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Under norms of published accounts, provisions may also have been made for unearned incomes and receipts, which may, or may not accrue later. “The cash flow statement is distinct from the income statement and balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded on credit.” (Reem Heakal 2008: Investopedia: What is Cash Flow Statements: The structure of CFS.
Capitalised accounts may be shown as revenue account in the profit and loss accounts to reduce profits and conversely, revenue may be capitalised to boost profits.
However, despite minor controversies, it is seen that cash flow statements are the lifeblood in any organisation, since cash profits are the main indicators for corporate health in the present days. “Garment manufacturers usually work with a short vision of the demand to come in the following months. So they want to borrow as little as possible while still making a good profit at the end of the year.” (Jose A. Sepulveda, Hawk M. Akin: Portal: 2008: Modeling a garment manufacturer’s cash flow using object-oriented simulation).
The excess of cash incomes over cash expenditures are called cash profits and are major determinants in payment of dividends, etc. Moreover, cash flow statements are required for meeting the day-to-day running expenses of the company and paying maintenance and other costs. It is often found, “however, the local public sector garment manufacturers are unable to access imported textiles due to cash flow constraints, i.e. they are unable to finance import letters of credit.“ (EPA: Ethiopian Privatization Agency: The Garment Sector: Overview: 2002.).
Importance of Cash flow statements
In the case of garment industry, the importance of cash flow statements rests in making budgetary cash provisions for future, cash investments based on present cash available, resource allocations to units and other financial decisions based on cash flow statements.
Thus, it is seen that cash flow statements play a very significant role in all types of business including garment-making industries, where it could be used to control stock movements, manage costs, provide for expenses and also deal with other finance related challenges of the company.
BNET 2008: Factors keep factories rolling in garment industry. Web.
Wachovia 2008: Borrowing against receivables to improve cash flows. Web.
Reem Heakal 2008: Investopedia: What is Cash Flow Statements: The structure of CFS. Web.
Jose A. Sepulveda, Hawk M. Akin: Portal: 2008: Modeling a garment manufacturer’s cash flow using object-oriented simulation. Web.
(EPA: Ethiopian Privatization Agency: The Garment Sector: Overview: (2002). Web.