Need for Cash Flow Statement

A project is an activity that involves investing sum of money now in anticipation of benefits spread over a period of time in the future. So, you encounter how you will determine whether project is financially viable or not? Immediately, you will sum up the benefits accruing over the future period and compare the total value of the benefits with the initial investment. If the aggregate value of the benefits exceeds the initial investment, the project is considered to be financially viable.

So, sound investment decisions should be based on the cash flow. But as you have studied earlier time value of the money will affect the cash flow generated. Hence, you have to calculate the net present value (NPV) of future returns. So, you will encounter with a first problem of what should be discounted? It is very clear that the returns of the future, needs to be discounted. The returns will be received by the investor in terms of flow of cash received from the investment made by means of proper investment decision.

Utility of cash flow statements are as follows:

• To identify the reasons for the reduction or increase in the cash balances irrespective level of the profits earned by the firm.
• It facilitates the management to maintain an appropriate level of cash resources.
• It guides the management to take futuristic decisions on the prospective demands and supply of cash resources through projected cash flows.
  • How much cash resources are required?
  • How much cash requirements could be internally settled?
  • How much cash resources are to be raised through external sources?
  • Which type of instruments are going to be floated for raising the required resources?
• It helps the management to understand its capacity at the moment of borrowing for any further capital budgeting decisions.
• It paves way for scientific cash management for the firm through maintenance of an appropriate cash levels i-e optimum level cash of resources.
• It avoids in holding excessive or inadequate cash resources through proper planning of cash resources.

It moots control through identification of variations occurred in the cash expenses and expenditures.