The contribution of cash holds a significant position in the business world. Its role is noteworthy for economic activities.
Not only it is important for running a business, but it is also necessary to every human activity. Its importance in business is similar to oxygen for a living being. There are different sources like sale of assets, issue of shares and other factors through which a company receives cash. The requirement of cash by a firm is for various purposes. Two of the important purposes are,
- Meeting daily expenses
- Making payment to suppliers
2 of the key responsibilities of a firm’s financial manager includes,
- Determining the activities involving cash planning
- Maintaining sufficient cash balance
From the above-stated responsibilities, it can be clearly noted that cash flow statement can be deemed as a tool of importance for cash planning and control.
Application of Cash flow statement
In financial analysis, Cash flow statement is seen as a tool of great importance as it necessary for financial management. Its applications are as follows:
- It provides assistance to the management by helping them to take and administer short-term financial policies.
- It helps the firms by strengthening their borrowing capacity. A company’s repaying capacities can be easily evaluated with the help of cash flow analysis.
- It plays an important role in capital budgeting decisions.
- In relation to liquidity, it assists in taking short-term financial decisions.
- In order to take important remedial measures for finding out variations, it is used to differentiate between actual cash flow statement and projected cash flow statement.
- It is used for overcoming excessive or deficit cash investment with the assistance of projected cash flow statement. This is the reason why projected cash flow statement is prepared on the basis of past years’ experience.
- It explains excessive cash balance at times of low profit and substandard cash position at times of surplus gains.