What Is the Cash Flow Statement and Its Importance for Companies

Why talk about cash? Does it make any sense to have resources available?

By: Jorge Alberto Reyes Caballero, M. in C. Economics and academic from the Banking and Commercial School.

In the economic entities, the generation of cash is of the utmost importance, because it allows them to continuously execute their operations, cover their immediate and direct obligations, and make investments for the sustainability and growth of the company. The generation, administration and use of this cash is presented in one of the most known and important financial statements: the statement of cash flow .

What is cash flow and what is its objective?


Cash flow “is a financial statement that shows the cash generated and used in operating, investing and financing activities . For this purpose, the change in the different items of the balance sheet that affect cash must be determined “.

The objective of the cash flow is to determine the capacity of the company, entity or person to generate the cash that allows it to fulfill its immediate and direct obligations, for its investment and expansion projects . In addition, this cash flow allows an analysis of each of the items that affect the generation of cash, which can be very useful to develop policies and strategies that allow the company to optimally use its resources.

What is the structure of the cash flow statement?

 What is the structure of the cash flow statement?

It is important to note that, as a basic financial statement, the cash flow statement came into force in 2008 , as established in Financial Reporting Standard NIF B-2, and its objective is to present interested users with the inflows and outflows of cash originated by the operation, investment and financing activities.

The activities that make up the structure of this financial statement are:

  • Operating activities: Are those activities of the operation related to the development of the corporate purpose of the company or entity, that is, with the production or commercialization of its assets, or the provision of its services.
  • Investment activities: Are those that refer to the investments of the company in fixed assets, in purchase of investments in other companies, securities, securities, etc.
  • Financing activities: Are those that refer to the acquisition of resources for the company, ranging from external sources of financing to the partners of the company or entity.

As noted, the structure of this financial statement aims to detect as soon as possible the origin of all the money that enters the company or entity, as well as to program everything that must be paid ; It is not up to you to judge the purchases, but to determine the hierarchy of the pending payments.

Where is the importance of this financial statement?


The importance of cash flow lies in the fact that it allows the economic entity and the person responsible for financial information to know how money and its equivalents are generated and used in the business administration . All companies need cash to perform their operations, pay their obligations and determine if their operation generates sufficient resources or require financing, so it becomes an important input for analysis and financial planning.

Therefore, in general, the statement of cash flow exposes the following:

  1. It shows the inputs and outputs that represent the origin and application of the resources in a certain period.
  2. In an inflationary environment, it eliminates the effects of inflation recognized in the financial statements.
  3. It is expressed in nominal values.
  4. In the presentation of the financial statement, it shows the generation or use of cash in operating, investment and financing activities.
  5. To formulate the financial statement, the direct or indirect method can be used, but both consider the cash inflows and outflows in the period.

Now that you know what the cash flow statement is and its importance in companies, what do you think about it?