Every business needs to make consistent profits to assure its long-term survival, but it needs to maintain adequate cash balances to pay its bills. Profits and cash flows are not the same thing; a business can have negative cash flows while, at the same time, show profits. The sources and uses of cash statement provides details about a company's cash inflows and outflows. This information is critical for a manager to completely understand the financial condition of his business and make the necessary decisions.


The sources and uses of cash statement, also called the cash flows statement, discloses the details about the cash outflows and inflows of a business over a specific time period. While accountants prepare the income statement on an accrual basis, they construct the cash flows statement strictly on a cash basis. Accrual basis accounting permits non-cash entries, such as depreciation, which can distort a realistic picture of cash flows. The sources and uses of cash statement analyzes cash flows from three areas: operating activities, financing and investing. Cash flows from operating activities represent the cash received from the sales of products and services, cash paid out for costs of production, payment of overhead expenses and changes in the amounts of balance sheet items, such as accounts receivable, inventory, fixed assets and current liabilities. Financing activities pertain to borrowing and loan repayments. These types of financing activities do not appear on the income statement; this is why an income statement can show profits, but the business can still experience negative cash flows. Investing activities describe any dividends paid out and any additional capital that has been injected into the business.

Discover Problems

A regular review of the sources and uses of cash statement helps to identify potential problem areas. Early discovery of these weaknesses gives management time to take corrective actions before they worsen. As an example, the business may be reporting a profit, but is struggling to pay bills on a timely basis. A review of the sources and uses of cash statement could reveal that cash has been consumed to fund increases in accounts receivable and inventory. Knowing this, management would focus on more effective collection of receivables and reducing unnecessary items in inventory.

Financial Planning

Using historical data gleaned from the cash flows statement, managers can construct plans on how to finance future purchases of fixed assets, increases in working capital needed to support growth and develop loan repayment schedules. Managers will be able to determine if growth can be funded from internal operating activities, taking out additional loans or asking shareholders to invest more capital. They can evaluate various financing alternatives and find out if the effects on the balance sheet are positive or negative.

Gauging Performance

The sources and uses of cash statement provides a way to gauge the performance of a business against industry averages for similar companies or against key competitors. Bankers, analysts and investors use this information to evaluate the health of a business and identify above-average or below-average performers. Business owners can use comparisons to identify areas of weakness within their company and set goals for improvement.