How does the statement of cash flows contribute to the question, "How well am I doing?"

krishna-agrawala | Student

Cash flow statement shows the details of cash of funds flowing in and out of a company. This statement is used more for determining the expected or planned availability and requirement of cash or funds in future rather than the past situation. Thus in general cash flow statement is not used for assessing the current performance of a firm. However, a projected cash flow statement can provide some insights into current performance of a firm.

To understand how a cash flow statement can reflect the performance of a firm, the first thing we need to understand that, availability of cash or liquid funds with a company does not necessarily reflect the assets or profits of the company. A company doing booming business and therefor making very high book profits may face a situation of cash shortage because of high accounts receivables and inventories. Similarly, a company may have lot of cash during business slump. The cash flow statement, therefor, only reflects company's ability to meet all its commitment of cash or funds during the projected cash flow statement period. It also indicates the extent to which a company is making use of its surplus cash or funds.

A company is requires cash for many of its business activities and other obligations such as repayment of loans taken. If a company is not able to arrange for cash from internal or other resources for this, the company can fail to achieve its potential performance targets in spite of other ingredients of success such as opportunity, quality, operating efficiency, and marketing efficiency being present. A projected cash flow statement enables a company to assess the its capabilities to meet future commitment of funds. A cash flow statement also enables a company to identify the future availability of surplus cash, and take timely action to utilize it in appropriate ways.