Unit 10: Cash Flow Preparation and Use
Now, let's explore how companies manage cash flow. Most companies use the revenues they generated yesterday to pay today's and tomorrow's expenses. For example, some companies manage their cash and maintain enough reserves to pay their expenses when they are due. Others must obtain capital loans to pay their bills, because they have highly seasonal sales or experience rapid growth and do not have enough savings to pay for the upfront costs to fund their expansion. While the company's income statement and balance sheet help monitor performance and their current financial condition, neither statement provides information about cash activity during a given time period.
Companies must manage their cash wisely to accommodate this lag time between revenues and expenses, so they can pay their bills in a timely manner. In this unit, we focus on how to prepare a statement of cash flows, which will provide important information about performance measures, cash-on-hand, and cash needed.
Completing this unit should take you approximately 7 hours.
In this unit, you learned what a cash flow statement is and why it is an important part of the management accounting tool box. Most companies, either because of legal requirements or because of prudence, create a cash flow statement as a part of their normal reporting documentation – Income Statement, Balance Sheet, Statement of Owner’s Equity and Cash Flow. With each accounting period, monthly or quarterly, the Cash Flow is updated to reflect actual sales and other relevant events. Managers need to be continually aware of their companies ‘cash’ position. In the next and last unit you will consider other metrics that managers should be aware of and use to monitor their companies economic health.