Cash flow analysis yields the following advantages:

  • It is very helpful in understanding the cash position of the firm. This would enable the management to plan and coordinate the financial operations properly.
  • Since it provides information about cash which would be available from operations the management would be in a position to plan repayment of loans, replacement of assets, etc.
  • It throws light on the factors contributing to the reduction of cash balance inspite of increase in income and vice versa.
  • A comparison of the cash flow statement with the cash budget for the same period helps in comparing and controlling cash inflows and cash outflows.

However, cash flow analysis is not without limitations. Cash balance disclosed by the cash flow statement may be incorrect and also not the accurate representation of the real liquid position of the business since it can be easily influenced by postponing purchases and other payments. Further cash flow statement cannot replace the income statement or funds flow statement.

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