Cash is the lifeblood of any business organization. It is the fuel that keeps a business alive. In simple terms, a business must have adequate cash to operate. Let’s know the definition of cash flow statement first.
Decision-makers pay close attention to the company’s cash position and the events and transactions causing that position to change. The cash flow statement maintain all of these above terms.
Definition of cash flow statement
Information about the events and transactions that affect the cash position of a company is reported in a financial statement called “Cash-Flow Statement”.
A Cash-Flow Statement is thus a statement depicting the various sources and applications of funds on similar lines as in Funds Flow Statement, with the difference that it will begin with the opening balance of bank and cash balances in hand and end with the closing balance at bank and in hand.
The statement details the sources from which business enterprises obtain resources during a period of time and the uses of these resources and the effect of the above on the cash position of the enterprise. It is truly a summary of Cash Book.
For example, if the cash balance of a business is shown by its Balance Sheet on 31st December 2000 at Tk 50,000, December 2001 is Tk 70,000, there has been an inflow of cash of Tk 20,000 in the year 2001 as compared to the year 2000. The cash-flow statement explains the reasons for such inflows or our flows of cash, as the case may be.
A term-lending institution has to ascertain when the project needs money for different purposes and find different sources of funds. The statement reveals the availability of cash to meet various requirements of the project from time to time such as, for the acquisition of fixed and other assets during the construction phase and for initial working capital at the commencement of operations.
It also helps management in making plans for the immediate future. A projected Cash-Flow Statement or a Cash Budget will help the management in ascertaining how much cash will be available to meet obligations to trade creditors, to pay bank loans, and to pay dividends to the shareholders.
Proper planning of the cash resources will enable the management to have cash available whenever needed and put it to some profitable or productive use in case there is surplus cash available. The term “Cash” here stands for cash and bank balances.
The utility of a Cash Flow Statement
A Cash-Flow Statement is useful to a banker in the following two ways:
- This statement ensures sound financial planning. The fund should be available in the form of cash as and when it is required for meeting the capital cost of the project. Not only cash should be adequate for business operations but it should be available at the right time. Adequate cash should be available not only for the installation of the plant but also for meeting the working capital requirements of the business.
- On the basis of the projected cash-flow statement, the banker can have information that will enable him to determine the period of the loan he may want to offer. He can also know whether the borrowing concern will be in a position to pay the installment of loan and interest as required by the bank.
The above terms of repayment are determined keeping in view the availability of funds with the borrowing concern so that the latter does not feel the unnecessary strain. The cash-flow statement thus helps the banker in assessing a proposal and determining the terms of repayment.
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