Using the Statement of Cash Flows for Decision Making

Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught history, and has an MA in Islamic law/finance. He has since founded his own financial advice firm, Newton Analytical.

Discover how to use the statement of cash flows for decision-making in business. Explore a review of cash flow statements and how they're used in decision making, and gain a deeper understanding with the provided example. Updated: 12/20/2021

Cash Flow Statements

So by now you've probably learned how to make a cash flow statement, the document that shows how money moves through a company every month, quarter, or whatever accounting period the firm chooses to use. But what can actually be learned from it? Sure, a company can get an idea of total expenses, total revenue, and how much money is coming in and out, but that's obvious. In fact, the cash flow statement is actually a very valuable piece of the equation when it comes to helping companies make the best decisions possible. In this lesson, see how companies can use the cash flow statement for decision-making, and then look at an example of this document in action.

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  • 0:04 Cash Flow Statements
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How It's Used in Decision Making

Simply put, cash can make or break a company. A company could have plenty of accounts receivable, meaning that plenty of people owe it money. However, without cash, it is unable to meet its own debts. After all, you can't just tell someone you owe money to that he should go collect it from someone else who owes you money - that's not how the world works!

Instead, from the cash flow statement, a company can answer that central question - can this company make cash? If the answer is yes, the question then becomes one of how much. Additionally, it can also become a question of what to do with that money. If someone is managing a company that has managed to not yet procure positive cash flow, then the decisions should be focused around gaining cash. However, if there is a positive cash flow, then there are more decisions to make.

Here are some examples of decision-making:

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