Cash Flow Analysis
The cash flow have important role in the business firm’s economic life. In any business firm there is a constant inflow and outflow of cash. What blood is to human body, cash is to business enterprises. So a major responsibility of financial management of firm is to maintain an adequate balance of cash. In many respects, the essence of finance function is found in the provision of cash in sufficient amount and in proper time to meet the needs of business.
Cash is spent for non-cash assets and these assets are in turn converted back into cash. Cost of raw materials, payment of wages and salaries and other expenses incurred in operating the business are converted back into cash as cash sales is made or collections from debtors are made. This movement of cash is of vital importance to management, for if the inflows of cash are not sufficient to meet the outflows, the firm will be unable to meet its current obligations. Here the need of proper planning and control of cashflows arises here. Cash flow Statement is an important tool of cash planning and control. At the same time it serves as a variable tool of financial analysis too.
DEFINITION
The current management accounting literature uses the term `cash-flow’ in two different ways. Some use ‘it to refer to the movement of cash in and out of the business. They are interested in accounting for the change in the cash account by subtracting the cash disbursements of the period from the cash receipts..Other use this term t represent funds provided from operations.
It is a concept of cash flow ;:prevalent in financial analysis that is net income plus non-fund charges such as depreciafica, amortization and depletion. But a we ‘:&friove the net income is hatdly computed on a cash basis_ 50
Adding back such items as depreciation does not convert the net income to something which can properly be called cash-flow or cash income. The later concept of cash- flow does not represent the net change in the cash account during the period under study, but rather the change in net working capital due to operations. Hence the first concept of cash-flow is more useful for financial analysis. We shall also use this term in our analysis in the first sense of the term.
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