Question

Why is the cash flow position the most critical aspect of any company?

Answer 1

The cash flow statement gives an insight that the balance sheet and income statement do not, especially in regard to a company's cash position. The statement of cash flows acts as valuable reporting tool for investors, creditors, and others assess.

The cash flow amount arising from operating activities is a significant indicator of the extent to which the enterprise operations have generated sufficient amount of cash to repay loans, pay dividends, maintain the operating capability of the enterprise, and make new investments without recourse to external sources of financing. The cash flows amount arising from investing activities is vital because it represent the extent to which expenditures have been made for resources that are intended to generate future income. The cash flows arising from financing activities is significant as it is helps in predicting claims on future cash flows by capital providers to the enterprise cash repayments of amounts borrowed.

The statement of cash flows is very vital to investors because it informs how much actual cash a company has generated. The management is keen in the company's cash inflows and cash outflows because these determine the amount of available cash required to pay its financial obligations. It is important to investor because cash flow helps in determining the company's liquidity and a project's rate of return or value. The management is keen in the company's cash inflows and cash outflows because these determine the amount of available cash required to pay its financial obligations.