The Importance of Cashflow Statements and Building a Financial History for MSMEs

May 18, 2022

By Team Kinara

< 1 mins read

MSME Loan

Maintaining financial history is integral to MSMEs as future strategies are based on these numbers. Lending companies also use the 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 about world history, humans would have continued to repeat the mistakes that led to catastrophic events. Similarly, not having a clear idea about the economic history can lead businesses to blunders that can take years to recover from. Acknowledging the importance of cash flow statements and building a strong financial history allows businesses to not repeat any mistakes and move forward with consistency and stability.

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Building a strong financial history holds 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 you 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.

In this article, we look at the importance of cash flow statements and building a financial history for MSMEs.

Financial History of an MSME: A Detailed Insight

Also regarded as financial statements, financial history reflects the performance of an MSME in a financial year. These can date back to the company's inception and serve as the benchmark for curating financial strategies.

The financial history determines the long-term stability of an enterprise and includes components such as cash flow, creditors, debtors, taxes, loans, etc. Financial history plays an integral role in determining the actual financial stature of an MSME and acts as the point of reference to construct plans of expansion.

For example, your small manufacturing plant wants to set a new goal of increasing the total production output for the next year. If you have a definitive record of the economic history of your enterprise, you can accurately determine the output of the current year and aim for an apparent increase. Building a financial history enables MSMEs to excel in the market.

Income Statement: Explained

The income statement is a critical financial document that helps evaluate an enterprise's business performance. It gives a clear outline of the cash that is generated by a firm in a financial year by dividing the entire cash flow into multiple operation heads. It showcases the accurate cash position of an MSME.

The Importance of Cash Flow Statements

Displaying the liquidity of your enterprise, the importance of cashflow statements is immense. It gives an accurate representation of the cash and cash-related assets that are present in your enterprise. The following are some reasons that highlight the importance of cash flow statements for MSMEs:

It helps MSME owners identify the variables that have an impact on the assets, liabilities, and operating expenses
Another significant importance of cash flow statements and financial records is that they help business owners in assessing the long-term cash flows of the company
The cash flow statement gives an honest idea about how much cash is being moved in the enterprise

The Benefits of Having a Comprehensive Financial Record for MSMEs

Easy loan acquirement: A strong financial history enables MSMEs to get loan approvals easily. Financial bodies can get a clear idea about the profits and losses and make a quick decision based on the application.
Enhanced performance: A comprehensive financial record helps MSMEs improve their overall performance by learning from any past profit fluctuations and better allocation of resources.

Kinara Capital: Disbursing Collateral-Free Business Loans Based on Financial History

At Kinara Capital, we provide 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: