LIMITATIONS OF CASH FLOW ANALYSIS
LIMITATIONS OF CASH FLOW ANALYSIS
Cash flow analysis is a useful tool of financial analysis. However, it has its own limitations. These limitations are as under.
1. Cash flow statement can not be equated with the income statement. An Income Statement taken into account both cash as well as non-cash items and, therefore, net cash flow does not necessarily 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 once it can be easily influenced by postponing purchases and Other payments.
3. Cash flow statement can not replace the income statement or the funds flow statement. Each of them as a separate function to perform.
Inspite of these limitations, it can be said that cash flow statement is useful supplementary instrument. It discloses the value as well as the speed at with the cash flows in the different segments of the business.
These help the management in knowing the amount of capital tide up in a particular statement of the business. The technique of cash flow analysis, when used in conjunction, with ratio analysis, serves as a barometer in measuring the profitability and financial position of the business.
