Utility of Cash Flow Analysis

A cash flow statement is useful for short term planning. A business enterprise needs sufficient cash to meet its various obligation in the near future such as payment for purchase of fixed assets, payment of debts maturing in the near future, expenses of the business etc.

i) It helps in efficient cash management – Cash is the basis for all operations and hence a projected cash flow statement will enable the management to plan and coordinate the financial operations properly. The management can know from which source it will be derived, how much can be generated internally and how much could be obtained from outside.

ii) It helps in internal financial management-It provides information about funds which will available from operation. This will help the management inn determining policies regarding the internal financial management eg, Possibility of repayment of long term debt, dividend policies, planning replacement of plant & machinery etc.

iii) Discloses the movement of cash- The increase in or decrease of cash and the reasons therefore can be known. It discloses the reasons for low cash balance in spite of heavy operating profit or for heavy cash balance in spite of low profit.

iv) Discloses success or failure of cash planning – The extent of success or failure of cash planning can be known by comparing the projected cash flow statement with the actual cash flow statement and necessary remedial measures can be taken.

Limitation of Cash flow analysis –

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1) Cash flow statement can nor be equated with the income statement. An income statement takes in to account cash as well as non-cash items and therefore net cash flow does not necessary mean net income of the business.

2) The cash balance as disclosed by the cash flow statement may not represent the real liquid position of the business since it can be easily influenced by postponing purchase and other payment.

3) Cash flow statement can not replace the income statement or fund flow statement. Each of them has a separate function .

However, the technique of cash flow statement when used in conjunction with ratio analysis serves as barometer in measuring the profitability and financial position of the business.