USES OF CASH FLOW STATEMENTS

Cash flow statements have many uses other than the legal need for some companies to prepare them. A few cases where a business might find them useful is answering such questions as below Small businessman may want to know why he now has an overdraft. He started off the year with money in the bank, he has made profit and yet he now has a bank overdraft.

Another businessman may want to know why the bank balance has risen even though the business is losing money. The partners in a business have put in additional capital during the year. Even so, the bank balance has fallen dramatically. They may want explanation as to how this has happened. A study of the final accounts themselves would not give them the information that they may needed. However, a study of the cash flow statement in each case will reveal the answer to their questions.

Besides the answers to such specific queries, cash flow statement should also help businesses to assess the following.

  1. The cash flows which the business may be able to generate in the future;
  2. How far the business will be able to meet future commitment, e.g tax due, loan repayments, interest payments, contracts that could possible lose quite a lot of money;
  3. How far future share issues may be needed or additional capital in the case of sole trader or partnership;
  4.  A valuation of the business
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