main advantages are as follows:
(i) Planning and
Co-ordination of Financial Operations. Cash Flow Statement is
useful is evaluating Financial policies and current cash position.
Since cash is the basis for carrying on operations, the Cash Flow
Statement prepared on an estimated basis for the next accounting
period will enable the management to plan and co-ordinate the
financial operations probably. The management comes to know how much
cash is needed in the future and at what time and how can it be
arranged-how much internally and how much from outside. It is
especially useful in preparing cash budgets.
Control Device. Cash Flow statement is also a control device for
the management. A comparison of cash flow statement of previous year
with the budget for that year would indicate to what extent the
resources of the enterprise were raised an applied according to the
plan. Thus a comparison of original forecast with actual results may
highlights trends of movement that might otherwise go undetected.
(iii) Useful to internal Financial Management. Since
it gives a clear picture of cash inflow from operations (and not
income flow of operation), it is, therefore, very useful to internal
financial management in considering the possibility of retiring
ling-term debts, in planning replacement of plant facilities or in
formulating dividend policies.
(iv) Profit and Cash
Positions. It enables the management to account for situation
when business has earned huge profits yet run without money or when
it has suffered a loss and still has plenty of money at the bank.
(v) Short-term Financial Decisions. Cash Flow
Statement helps the management in taking short-term financial
decisions. Suppose, if firm wants to know its state of solvency
after one month from to date, it is possible only from Cash Flow
analysis and not from Fund Flow Statement. Shorter the period,
greater is the importance of Cash Flow Statement.