Evaluating Your Business Through Your Cash Flow Statement 

Your company’s cash flow statement shows where revenues come from, and where expenses go, so as a reflection of your daily business activities, they can be very revealing. It consists of three main sections: operating activities, investing activities, and financing activities, and between these three areas, a great deal can be learned about your business.

How appealing is your business to lenders and investors?

Banks scrutinize the financing section of your cash flow statement very carefully, so they can see how well you’ve handled loan repayments over time. Investors like to look closely at your operating activities so they can tell if your business generates steady cash flow, and therefore has a lower risk factor.

Do you have excess cash?

When your cash flow statement shows that you have excess cash, that’s the time to start thinking about investing in major new assets, saving cash against a down period in the future, and just generally putting it to good use in improving the business.

Do you have excess inventory?

Your cash flow statement might make it obvious that you’re carrying too much inventory, and that costs lots of money these days. If you aren’t using Just-in-Time methods, you should be, because excess inventory has a way of eating up profits.

Are you paying bills too quickly?

Being conscientious about paying your business bills is nice, but if you’re paying too quickly, you are probably losing money. When you send out payments a week or two, or maybe even three weeks early, you’re losing out on time that money could be earning interest in your bank account.

Are your customers paying late?

This is even worse than you paying too soon, because it will have the effect of creating cash flow problems if it happens with regularity. There are a number of things you can do to discourage this, for instance charging late fees, offering discounts for early payment, invoicing immediately, and following up right away with late-paying clients.

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