The Importance of Cash Flow Statements and Building a Financial History for MSMEs

July 7, 2023
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Maintaining financial history is integral to Micro, Small and Medium Enterprises (MSMEs), as future strategies are based on these numbers. Lending companies also use financial history to assess a business for various loan products. The significance and importance of having an economic history can be closely related to world history itself. Without any knowledge of world history, humans would have continued to repeat the mistakes that led to catastrophic events. Similarly, not knowing the economic history can result in businesses making costly mistakes that can take a long time to recover from. Acknowledging the importance of cash flow statements and building a strong financial history allows businesses not to repeat any mistakes and move forward with consistency and stability.

Building a strong financial history holds the utmost significance for small businesses. Access to limited resources and a high degree of competition necessitates the precise execution of business ideas that are usually based on the company’s economic record. Not only that, but a financial history will help business owners understand periods of profitability and prepare for dips in the year. For instance, trading companies tend to perform better during the festival season. Using cash flow statements from the previous years, you can predict the revenue that will be generated and create a strategy to increase it this year.

The importance of cash flow cannot be downplayed, it even helps plan for when – may need additional working capital in the form of an MSME loan. Furthermore, it is important for small business owners to separate their personal and business finances for personal and tax protection purposes. It is always easy to keep track of the business expenses for accurate tax evaluations if they are part of a separate account. 

This article discusses the importance of cash flow statements and building a financial history for MSMEs. 

Financial History of an MSME: A Detailed Insight

Financial history, also referred to as financial statements, is a comprehensive reflection of an MSME’s performance over a given financial year. It encompasses data that spans from the company’s inception and serves as a fundamental benchmark for shaping financial strategies. The financial history of an MSME determines its long-term stability and includes vital components such as cash flow, creditors, debtors, taxes, loans, and more. This historical data plays a crucial role in assessing the true financial position of an MSME and acts as a reference point for formulating expansion plans and goals. 

For instance, let’s consider a small manufacturing plant that aims to increase its total production output in the coming year. By analysing the accurate record of the enterprise’s financial history, they can assess the current output and set a realistic target for improvement. Building a strong financial history empowers MSMEs to thrive in the market by providing them with valuable insights and a solid foundation for decision-making. It enables businesses to track their financial progress, identify strengths and weaknesses, and make informed choices regarding resource allocation and future endeavours. 

Additionally, a well-documented financial history enhances credibility and fosters trust among stakeholders, such as lenders, investors, and partners. By maintaining an up-to-date and comprehensive financial history, MSMEs can position themselves for success, adapt to changing market conditions, and seize growth opportunities with confidence. Ultimately, the creation and analysis of a robust financial history serve as a catalyst for the sustainable growth and prosperity of MSMEs.

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Income Statement: Explained

The income statement stands as a pivotal financial document that serves to evaluate the overall business performance of an enterprise. It provides a comprehensive and transparent overview of the cash generated by a firm throughout a given financial year, meticulously breaking down the entire cash flow into multiple operation heads. By presenting a detailed breakdown, the income statement effectively highlights the accurate cash position of an MSME, shedding light on its revenue sources, expenses, profitability, and potential areas of growth or concern. This document serves as a valuable tool for assessing the financial health and viability of the business, enabling stakeholders to make informed decisions, identify trends, and devise strategies for future growth and improvement. 

Additionally, the income statement plays a crucial role in financial analysis. It enables comparison with previous years’ performance and industry benchmarks. It also facilitates the evaluation of the company’s operational efficiency and effectiveness. By leveraging the insights gained from the income statement, MSMEs can effectively allocate resources, optimise profitability, and make informed financial decisions to navigate challenges, seize opportunities, and drive sustainable success in the dynamic business landscape.

Cash Flow Statements

The Importance of Cash Flow Statements

Cash flow statements hold immense significance as they effectively demonstrate the liquidity of an enterprise. They provide an accurate representation of the cash and cash-related assets present within the business. Several reasons highlight the importance of cash flow statements for MSMEs:

First, cash flow statements assist MSME owners in identifying the variables that impact assets, liabilities, and operating expenses. By analysing these statements, business owners can gain insights into the factors influencing the financial health of their company and make informed decisions regarding resource allocation and cost management. 

Second, cash flow statements and financial records are invaluable for assessing the long-term cash flows of the company. By examining historical cash flow data, MSME owners can forecast future cash flows, allowing for effective budgeting, financial planning, and growth strategies. It helps identify periods of cash surplus or shortfall, enabling proactive measures to be taken.

Moreover, cash flow statements provide an honest depiction of the inflows and outflows of cash into the enterprise. They reveal how much cash is being generated from operating activities, investing activities, and financing activities. This information is essential for understanding the sources and uses of cash within the business and for evaluating its ability to meet financial obligations, invest in growth opportunities, and generate sustainable profits.

By regularly monitoring and analysing cash flow statements, MSMEs can proactively manage their cash position, mitigate cash flow challenges, and optimise their financial performance. It enables them to assess the impact of their operations on cash reserves, plan for contingencies, and make strategic decisions to enhance liquidity and profitability.

The Benefits of Having a Comprehensive Financial Record for MSMEs

Having a comprehensive financial record is of utmost importance for MSMEs. It offers numerous benefits that contribute to their success and sustainability. Here are the key advantages of maintaining a comprehensive financial record:

1. Financial Analysis and Decision-Making:

A comprehensive financial record enables MSME owners to conduct in-depth financial analysis. They can assess the company’s financial performance, identify trends, and make informed decisions based on accurate data. This includes evaluating profitability, monitoring cash flow, tracking expenses, and measuring key financial ratios. With a clear understanding of the financial health of the business, owners can make strategic choices to optimise operations, allocate resources effectively, and drive growth.

2. Access to Financing:

Financial institutions and lenders require detailed financial records when considering loan applications. A comprehensive financial record provides credibility and demonstrates the MSME’s ability to manage its finances effectively. It increases the chances of securing loans and favourable terms, allowing businesses to invest in expansion, equipment, or working capital.

3. Compliance with Legal and Regulatory Requirements:

MSMEs need to comply with various legal and regulatory obligations, including tax filing, financial reporting, and auditing. A comprehensive financial record ensures accurate reporting and helps avoid penalties or legal issues. It provides the necessary documentation for tax authorities, government agencies, and potential audits.

4. Risk Management and Performance Evaluation:

A comprehensive financial record aids in risk management. It helps identify potential financial risks, such as cash flow shortages, excessive debt, or over-reliance on certain revenue sources. By monitoring and analysing financial records, MSMEs can take proactive measures to mitigate risks, improve cash flow management, and ensure business continuity. Regularly maintaining financial records allows MSMEs to evaluate their performance objectively. By comparing actual financial results against targets and benchmarks, businesses can identify areas of strength and weakness. This evaluation helps refine strategies, streamline operations, and drive continuous improvement.

Having a comprehensive financial record is essential for the success and growth of MSMEs. It enables financial analysis, informed decision-making, access to financing, compliance with legal requirements, strategic planning, risk management, investor confidence, and performance evaluation. MSMEs that prioritise maintaining accurate and up-to-date financial records gain a competitive edge and position themselves for long-term success in the dynamic business landscape.

Cash Flow


Cash flow statements and building a strong financial history are of paramount importance for MSMEs. It provides a clear understanding of the liquidity and cash-related assets within the business, enabling owners to make informed decisions regarding resource allocation, cost management, and growth strategies. They also help assess long-term cash flows, forecast future financial performance, and ensure the availability of funds to meet obligations and seize opportunities. 

Furthermore, building a comprehensive financial history allows MSMEs to track their financial progress, identify trends, and learn from past experiences. It serves as a benchmark for evaluating performance, setting realistic goals, and making strategic decisions. Financial history enhances credibility, facilitates access to financing, and fosters trust among stakeholders, such as lenders, investors, and partners.

By maintaining accurate and up-to-date financial records, MSMEs can proactively manage their cash position, mitigate cash flow challenges, and optimise their financial performance. It enables them to identify areas for improvement, make informed financial decisions, and navigate the dynamic business environment with confidence. Moreover, financial history provides valuable insights into the factors influencing the assets, liabilities, and operating expenses of the business. It helps identify variables that impact financial health, profitability, and sustainability. With a clear understanding of these factors, MSME owners can make informed decisions to drive growth, allocate resources effectively, and maximise profitability.

Kinara Capital provides MSMEs with ample financial support to commence and grow their business operations. A strong financial record allows entrepreneurs to get their hands on better interest rates. The following is the 3-step loan application process at Kinara Capital: 

  • Take the 1-minute eligibility check on the myKinara app or website
  • Secure KYC and income verification
  • Quick loan disbursement

For further queries or doubts, MSMEs can contact Kinara’s in-house customer support team by giving a missed call at 080-68264454.

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