Do not ignore the cashflow
Author: Bright Path Business Consultants
For many businesses, the first thing they look for in a company’s financial statements is profits. When they see earnings are going up, they believe that the company is doing well.
For many businesses, the first thing they look for in a company’s financial statements is profits. When they see earnings are going up, they believe that the company is doing well.
Generally this may be true, but with accrual accounting, revenues and expenses are recorded when they occur, not when cash actually changes hands. One might ask what the difference is, the answer is all businesses relies on generating cash. The income statement, however, records non-cash revenue and expenses as well, which can distort the health of the company.
A company must have cash to pay taxes, operating expenses, pay its employees and implement expansion plans. Having cash on hand also provides a buffer against future financial problems. If cash is not flowing into the business, it could therefore be a sign of underlying challenges.