What is the Significance of Cash Flows?

As owners and managers we deal with cash flow day in day out! Though do you find that you get caught up in the day to day operational activities within your business and neglect the ins and outs until it can’t be held off any longer? Sales, marketing, working in the business and a quick glance at the bank balance to make sure its not in the red.. sound familiar?We are all guilty of this and its really easy to do so. Below we take you through a technical account of cash flow.

So what is cash flow? It is simply a stream of cash inflows and cash outflows, which changes the cash account, during a specific course of a business. Cash inflows means increase money or revenues and cash outflows are the expenses of a business.


Cash Flows Statement

The statement of cash flows categorizes cash inflows and cash outflows into operating, investing and financing activities.

Significance of Cash Flows Statement

Taking into consideration the importance of the cash, it is not unanticipated that the statement of the cash flows has become one of the most important financial statements. The statement of cash flows gives managers, analysts, commercial lenders and investment bankers from beginning to end explanation of the changes that happened in the firm’s cash balances.
Owner-managers may use the statement of cash flows to provide evidence the cash creation by operations, and investing and financing policy.  The parties like banks (creditors), investors (owner’s or Shareholders) may use it to decide such effects the firm’s capability to increase dividends and its capacity to give debt with cash from operations. They also make a comparison of cash from financing to cash from operations activities.

Cash Flows Statement Elements

The cash flow statement start from the operating activities, followed by investing activities and then financing activities.
Cash Flows from Operating Activities:

It excludes all transactions relating to investing and financing cash transactions. The cash inflows from the operating activities include the sale of goods or services and bank interest loans. The outflows include the payment for inventory, employee’s salaries payment, and any interest expense.

Cash Flows from Investing Activities:

It is the cash inflow from the sale of, machinery, plant, and property.  The cash outflow occurred due to the purchase of property, equipment, plants and machinery.

 Cash Flows from Financing Activities:

The financing activities have relation with liabilities and owner investment in the business. The cash inflow is from the short term and long term borrowings. The cash outflow is due to the return of borrowed amount.


The cash flows statement has some changes in financing, investing and operating activities for the larger more corporate companies. The above information is just for the use of small and medium businesses.

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