Cash Flow Analysis

28/06/2021 2 By indiafreenotes

A Cash flow analysis is analysis which is prepared by acquiring Cash from different sources and the application of the same for different payments throughout the year.

It is prepared from analysis of cash transactions, or it converts the financial transactions prepared under accrual basis to cash basis.

Cash Flow Analysis is a technique used by businesses to determine the value of overall companies as well as the individual branches of large companies by looking at how much excess cash they produce. They uses the Statement of Cash Flows, a document that shows the actual cash that came in and out of the business during a certain period from investing activities, financing activities, and operational activities, as well as a few other reports.

The information about the amount of resources provided by operational activities or net income after the adjustment of certain other charges can also be obtained from it. The changes in Cash both at the beginning and at the end can also be known with the help of this statement and that is why it is called Cash Flow Statement.

Month after month, many individuals look at their bank and credit card statements and are surprised that they spent more than they thought they did. To avoid this problem, one simple method of accounting for income and expenditures is to have personal financial statements. Just like the ones used by corporations, financial statements provide you with an indication of your financial condition and can help with budget planning.

There are two types of personal financial statements:

  • The personal cash flow statement
  • The personal balance sheet

Components of Cash Flow

  • Income
  • Loan EMIs
  • Taxes
  • Fixed expenses
  • Liquid expenses

Objectives of Cash Flow Statement

The primary objective of cash flow statement is to supply the necessary information relating to generation of cash to the users of financial statement. It also highlights the future or prospective cash positions i.e. cash or cash equivalent. The inflows and outflows of cash can be represented with the help of this statement.

(a) Measurement of Cash

Inflows of cash and outflows of cash can be measured annually which arise from operating activities, investing activities and financial activities.

(b) Generating inflow of Cash

Timing and certainty of generating the inflow of cash can be known which directly helps the management to take financing decisions in future.

(c) Classification of activities

All the activities are classified into operating activities, investing activities and financial activities which help a firm to analyse and interpret its various inflows and outflows of cash.

(d) Prediction of future

A cash flow statement, no doubt, forecasts the future cash flows which helps the management to take various financing decisions since synchronisation of cash is possible.

(e) Assessing liquidity and solvency position

Both the inflows and outflows of cash and cash equivalent can be known, and as such, liquidity and solvency position of a firm can also be maintained as timing and certainty of cash generation is known i.e. it helps to assess the ability of a firm to generate cash.

(f) Evaluation of future cash flows

Whether the cash flow from operating activities are quite sufficient in future to meet the various payments e.g. payment of expense/debts/dividends/taxes.

(g) Supply necessary information to the users

A cash flow statement supplies various information relating to inflows and outflows of cash to the users of accounting information in the following ways:

  • To assess the ability of a firm to pay its obligations as soon as it becomes due;
  • To analyses and interpret the various transactions for future courses of action;
  • To see the cash generation ability of a firm;
  • To ascertain the cash and cash equivalent at the end of the period.

(h) Helps the management to ascertain cash planning

No doubt, a cash flow statement helps the management to prepare its cash planning for the future and thereby avoid any unnecessary trouble.

Features of Cash Flow Statement

The significant features are:

(i) Cash Flow Statement is very dynamic in character since it records the investment of cash from the beginning of the period to the end of the period.

(ii) It is a periodical statement as it covers a particular period.

(iii) This statement does not recognise matching principles.

(iv) This statement helps to calculate Cash from Operations/Cash Flows from Operational activities.

(v) It exhibits the changes of financial positions relating to operational activities, investing activities and financial activities respectively, by which an analyst can draw his conclusion.

Utility or Importance of Cash Flow Analysis

Cash Flow Statement is particularly useful in short-term planning. In order to meet the various obligations, a firm needs sufficient amount of cash (e.g. payment for expenses, purchase of fixed assets, payments for dividend and taxes etc.).

It helps the financial manager to make a cash flow projection for immediate future taking the data, relating to cash from the past records. As such, it becomes easy for him to know the cash position which may either result in a surplus or a deficit one. However, Cash Flow Statement is an important financial tool for the management to make an estimate relating to cash for the near future.

(a) Helps to make Cash Forecast

Cash Flow Statement, no doubt, helps the management to make a cash forecast for the near future. A projected Cash Flow Statement helps the management about the cash position which is the basis for all operations and, thus, the management sees light relating to cash position, viz. how much cash is needed for a specific purpose, sources of internal and external issues etc.

(b) Helps the Internal Management

It helps the internal management to determine the financial policy to be adopted in future since it supplies information relating to funds, e.g. taking decision about the replacement of fixed assets or repayment of long-term liabilities etc.

(c) Reveal the Cash Position

It is a significant pointer about the movement of cash, i.e. whether there is any increase in cash or decrease in cash and the reasons thereof which helps the management. Moreover, it explains the reasons for a small cash balance even though there is sufficient profit or vice versa.

Besides, the management can compare the original forecast with the actual one in order to understand the trend of movement of cash and the variation therefore.

(d) Reveals the result of Cash Planning

How far and to what extent the cash planning becomes successful, is revealed by the analysis of Cash Flow Statement. The same is possible by making a comparison between the projected Cash Flow Statement/Cash Budget and the actual one, and the measures to be taken.


Insurance Planning: A proper back up plan is as important as a sound and stable investment plan. Many of you must be having number of insurance policies in your portfolio, but are not sure of the adequacy of insurance cover in that. Some of you have also been bought those policies with a view of saving for future and thus major portion of your cash surplus would be going into those products. Without commenting on the type of products you have bought, what is important for you to understand is the Insurance cover being offered collectively by all those policies.

Asset purchase and Debt management: Having own house or new car has always been one of the most important or thrilling goal for many of you, but buying it on loan needs the understanding of your cash flow position. Though banks will look at it from the repayment capacity of the borrower, financial planning along with will also look on the impact it will bring on other goals too. Debt management and goal planning go hand in hand.

Goal Setting: What is Retirement Planning? It is about managing your current finances and investing the surplus generated in such a way so you can accumulate a decent amount, to lead you to comfortable post-retirement years when you will not be getting monthly income. At that time your savings will be your only source of income generation.

Personal Cash Flow Statement

A personal cash flow statement measures your cash inflows and outflows in order to show you your net cash flow for a specific period of time. Cash inflows generally include the following:

  • Salaries
  • Interest from savings accounts
  • Dividends from investments
  • Capital gains from the sale of financial securities like stocks and bonds

Cash inflow can also include money received from the sale of assets like houses or cars. Essentially, your cash inflow consists of anything that brings in money.

Cash outflow represents all expenses, regardless of size. Cash outflows include the following types of costs:

  • Rent or mortgage payments
  • Gas
  • Utility bills
  • Groceries
  • Entertainment (books, movie tickets, restaurant meals, etc.)

Personal Balance Sheet

A balance sheet is the second type of personal financial statement. A personal balance sheet provides an overall snapshot of your wealth at a specific period in time. It is a summary of your assets (what you own), your liabilities (what you owe), and your net worth (assets minus liabilities).


Assets can be classified into three distinct categories:

  • Large Assets: Large assets include things like houses, cars, boats, artwork, and furniture. When creating a personal balance sheet, make sure to use the market value of these items. If it’s difficult to find a market value, use recent sales prices of similar items.
  • Liquid Assets: Liquid assets are those things you own that can easily be sold or turned into cash without losing value. These include checking accounts, money market accounts, savings accounts, and cash. Some people include certificates of deposit (CDs) in this category, but the problem with CDs is that most of them charge an early withdrawal fee, causing your investment to lose a little value.
  • Investments: Investments include bonds, stocks, CDs, mutual funds, and real estate. You should record investments at their current market values as well.


Liabilities are merely what you owe. Liabilities include current bills, payments still owed on some assets like cars and houses, credit card balances, and other loans.