Question

What do you understand on the term “cash flow analysis”? Explain its importance in financial aspects of a company.

Answer 1

Answer :-

Cash flow analysis is evaluation / examination of cash movement of a business organization (company) under the following three different heads namely :-

1). Cash flow from operating activities.

2). Cash flow from investing activities.

3). Cash flow from financing activities.

Sum of these three types of cash flow reflects net increase or decrease of cash and cash equivalents for company.

Cash flow analysis shows three main categories of cash inflows and cash outflows, namely :-

Operating activities :- Operating activities are the principal revenue generating activities of a business enterprise / company.

Investing activities :- Investing activities include the acquisition and disposal of long-term assets and other investments but does not include cash equivalents.

Financing activities :- Financing activities are activities that result in change in the size and composition of the owner's capital (including preferred stock in case of the company) and borrowings of the business organization (company).

Importance of cash flow analysis :-

1). Cash flow analysis helps to coordinate among management policies and financial conduction of the business so that proper cash is available for payment of liabilities.

2). Cash flow analysis tells about the increase and decrease of cash amount with reasons thereto. It also informs that how the institution earns higher profit with less cash despite of more cash available.

3). Cash flow analysis is helpful in financial planning of the business organization. Proper planning about managing the cash for future projects, interest, dividend etc. is possible with the cash flow analysis.

4). Cash flow analysis presents the statistical analysis of cash flows of past years which helps in the future estimation of sources and utilization of cash funds.

5). Cash flow analysis controls the flow of cash while considering the future estimates of cash to be available and the actual leftover.