Question

Give three advantages of a cash flow statement.

Explain the advantages of a cash flow statement.

Answer 1

1. Cash flow statement helps in internal financial management. It is useful in formulation of financial plans, e.g., possibility of repayment of long-term loans dividend policy, replacement of plant and machinery, etc.
2. Cash flow statement discloses the movements of cash and reasons thereof. It tells the reasons for less cash balance in spite of heavy operating profits or for heavy cash balance in spite of low profits.
3. Cash flow statement discloses success or failure of cash planning. Actual cash flow statement and projected cash flow statement can be compared to detect deficiency, if any, in cash management. Remedial measures can then be taken to remove the deficiency.
4. Cash flow statement helps in efficient cash management. It is useful in evaluating financial policies and cash position of the business. 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. The management can know how much cash is needed, from which source it will be derived, how much cash can be generated internally and how much could be obtained from outside.