ABBA NETWORK

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

A historical analysis of the different sources and applications of cash will enable the management to make reliable cash flow projections for the immediate future. It may then plan out for investment of surplus or meeting the deficit, if any. Thus, cash flow analysis is an important financial tool for the management.

Advantages of Utility of Cash flow Analysis are as follows:
1. HELPS IN EFFICIENT CASH MANAGEMENT
Cash flow analysis helps in evaluating financial policies and cash position. 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 how much cash is needed, from which source it will be derived, how much can be generated internally and how much would be obtained from outside.

HELPS IN INTERNAL FINANCIAL MANAGEMENT
Cash flow analysis provides information about funds which will be available from operations. This will help the management in determining policies regarding internal financial management, e.g. possibility of repayment of long term debts, dividend policies, planning, replacement of plant and machinery, etc.

3. DISCLOSES THE MOVEMENTS OF CASH
Cash flow statement discloses the complete story of cash movement. The increase in or decrease of cash and the reason therefore can be known. It discloses the reasons for low cash balance in spite of heavy operating profits or for heavy cash balance in spite of low profits. However, comparison of original forecast with the actual results highlights the trends of movements of cash which may otherwise go undetected.

4. DISCLOSES SUCCESS OR FAILURE OF CASH PLANNING
The exteral 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.

Statement showing the sources and uses of cash prepared from the historical data, i.e. Income statement is called Cash-Flow Statement. It simply reveals the

inflow and outflow of cash during the previous period. Such a statement can be prepared for a year, half year, a month, a week or for any other duration. Its main function is to explain the causes of change in cash balances of the firm for two different dates.

Conceptually, there is no difference between a Cash-Flow statement and a cash budget, statements showing the sources and uses of cash can be prepared on the basis of historical data as well as on the basis of forecasts. Statements prepared on the basis of historical data are called Cash-Flow statements while based on projected data for future are known as Cash Budget.
The Cash-Flow budget is used to project cash needs: to identify cash surpluses and to highlight possible critical points in the income and outgo of cash.

Thus cash-flow statement is a useful technique of historical financial analysis while cash budgets is an indispensable technique of financial forecasting.

As we know the term ‘fund’ has been defined in a number of ways. Some financial experts interpret ‘fund’ as ‘cash’ only and fund-flow statement - prepared on this basis is called a cash flow statement. In this type of statement only inflow and outflow of cash is taken into account. On the other hand, some experts interpret ‘funds’ as money value in whatever form it may exist in the company.

It is conceived as ‘all financial resources’ and it extends the concept include all the current assets or financial resources. Thus, the narrow definition of fund, such as cash- flow, leads us to the concept of hard cash It omit, such items which do not directly affect cash or workingcapital. But in a broader sense, the assets of a firm represent the net uses of funds and its liabilities and net worth represent net resources.

The main object of cash-flow analysis is to show the causes of changes in cash balances. The Funds-Flow Statement reveals the causes of change in net working capital and informs the management on the liquid position of .the company. But, when management is interested to know about the movement of cash and the availability of cash, the cash-flow analysis provides this information to management.

Cash-flow analysis is not only concerned with the good or bad management of cash, it is deeply concerned with the liquidity position of the firm. In a cash-flow statement, the term ‘fund’ is used to mean only cash and does not include even most liquid current assets (but not cash itself) like readily reliable account receivables. Since cash-flow statement is made to show the impact of financial policies and financial procedures on the cash position of the firm, it takes into consideration all transactions that have a direct impact upon cash.
The next main object of cash-flow analysis is to throw light on the factors contributing to the reduction of balance of cash inspite of increase in profits of vice versa. Cash-flow analysis is of particular importance in short-range planning. It helps the management in short-term financial decisions relating to liquidity and ways and means position.

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.