Cash Flow and Capital Budgeting
Cash Flow Definition
Fund Flow or Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business during a specific period of time.
Why is cash flow important?
The success of any business can be determined through its capacity to generate positive cash flows. Therefore, Cash inflow and outflow is considered as one of the most significant indicators of the continued existence of a business in future. Keeping in view the importance of cash flows, the stakeholders focus on two things while investing in business:
- First, how does business generate funds and
- Second, where does business invest those funds for generating more cash flows.
Cash flows statement
The statement of cash flows shows increase and decrease in cash and cash equivalents rather than working capital.
Objectives of a cash flows statement:
The main objective of a cash flow statement is to assist financial statement users:
- In assessing the business’s ability to generate positive cash flows.
- In assessing business’s ability to bridge the gap between outflows and inflows of funds.
- In assessing its ability to meet its short and long-term obligations.
- In assessing the rationale of differences between reported and related cash flows.
- In assessing the effect on finances of major projects during the year.