Cash Flow Statement | Objectives | Advantages & Importance

Objectives of Cash Flow Statement

The following are some of the objectives of cash flow statement.

1. The management can find the movement of cash for a specific period.

2. There is a possibility of using cash very properly through preparing cash flow statement.

3. The management can take corrective action if there is any misappropriation of cash or if any default in.the utilization of cash.

4. The management can assess the quantum of cash required for a specific period. Moreover, the management can make an arrangement of cash at required time for smooth running of the company.

5. The management can take many decisions with regard to short term finance.

Advantages, Uses or Importance of Cash Flow Statement

The various uses and importance of cash flow analysis can be briefly explained below.

1. It discloses the causes of variations in cash i.e. opening cash and closing cash for a particular period.

2. It facilitates the management for implementing short term financial plan.

3. It is highly useful to management for assessing its ability to meet its short term financial obligations such as payment to sundry creditors, payment of wages and salaries, payment of interest for banks’ and financial institutions’ loans, payment of interest on debentures, payment of dividend to shareholders and the like.

4. The financial plans of the company can be revised according to necessities on the basis of cash flow analysis.

5. It reflects good or bad management of the business.

6. Some factors are responsible for variations of cash. Such factors can be observed with the help of cash flow analysis.

7. The financial plan and policies are prepared with the help of detailed information of cash flow analysis in the years to come.

8. The banks and financial institutions can decide before lending loan facilities on seeing the cash flow statement.

9. It helps the internal financial management to find out the possibility of retiring long term debt.

10. It helps the top management to coordinate financial operations properly.

11. It highlights the factors which are responsible for lower cash balance in spite of increase in income or vice versa.

12. The cash expenditure can be controlled by comparing cash flow statement and cash budget for the same period.

13. The company can make an arrangement of future cash requirements on the basis of projected cash flow statement.

14. It is used for inter-firm and intra-firm comparison to identify the efficiency of operation.

15. The mismanagement of cash can be properly analyzed and its recurrence can be avoided in the days to come.

16. The projected cash flow statement helps the management to,prepare cash budget.

17. It can be used for appraisal of various capital investment projects just to determine their viability and profitability.