Question

Why is it critical to track your cash flow and how can that be categorized? Does good cash flow automatically mean profits? Explain.

Answer 1

It is critical to track the cash flows because cash flow statements will be offering with details about the liquidity of company and it will be offering the inflows and outflows informations about the company regarding various investments and expenses made.Cash flow statement are considered one of the most important statement while analysis of the financial position of the company because it will be determining the current liquidity position of the company and it will be helpful in estimation of the ability of the company in order to have flexibility into its operations.

Cash flows are generally categorised under three head and they could be cash flows from operating activities along with cash flows from investing activities and cash flows from financing activities and cash flows from operating activities will be considering all such cash flows which are related to the day-to-day operations where as cash flows from investing activities related to investment and cash flows from financing activities will be related to generation of capital.

Good cash flows will not be meaning profits because highee cash flows does not always result into profit for the company as company can have a higher inflow of cash due to receipt of capital or sale of assets at loss so it does not mean that it will always have a higher profit just because it has higher cash flows.