cash flow
analysis
Monitoring the cash situation of any business is the key. The
income statement would reflect the profits but does not give any
indication of the cash components. The important information of
what the business has been doing with the cash is provided by the
cash flow statement. Like the other financial statements, the cash
flow statement is also usually drawn up annually, but can be drawn
up more often. It is noteworthy that cash flow statement covers the
flows of cash over a period of time.
- Cash Flow Statements help in knowing the liquidity / actual
cash position of the company which funds flow and P&L are
unable to specify.
- As the liquidity position is known, any shortfalls can be
arranged for or excess can be used for the growth of the
business
- Any discrepancy in the financial reporting can be gauged
through the cash flow statement by comparing the cash position of
both.
- Cash is the basis of all financial operations. Therefore, a
projected cash flow statement will enable the management to plan
and control the financial operations properly.
- Cash Flow analysis together with the ratio analysis helps
measure the profitability and financial position of business.
- Cash flow statement helps in internal financial management as
it is useful in formulation of financial plans.
Disadvantages of Cash Flow Statement:
- Through the cash flow statement alone, it is not possible to
arrive at actual P&L of the company as it shows only the cash
position. It has limited usage and in isolation it is of no use and
requires BL, P&L for its projections. Cash flow statement does
not disclose net income from operations. Therefore, it cannot be a
substitute for income statement
- The cash balance as shown by the cash flow statement may not
represent the real liquidity position of the business because it
can be easily influenced by postponing the purchases and other
payments
- Cash flow statement cannot replace the funds flow statement.
Each of the two has a separate function to perform.
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