Cash flow analysis is the examination of inflow and outflow of the company for a specific period. The analysis starts with opening balance, generates ending balance after accounting for all cash receipts and paid expenses during the period. Cash flow analysis usually used for the purpose of financial reporting.
Explanation of Cash Flow Analysis
Cash flow analysis is the methodology of analyzing the operating, financing, and investing activities of a company. The main objective of this analysis is to identify cash flow problems in a given time frame as well as cash flow opportunities. On the other hand, the Securities and Exchange Commission ensures that every company has to submit the cash flow statement along with quarter and annual reports. This analysis helps managers, investors, and lenders in order to translate the earnings of the company on the income statement.
Working capital is an essential part of cash flow analysis. Computation of working capital amount provides quick analysis regarding business liquidity over the future accounting period. If a company has sufficient working capital amount, then it is useful in preparing a cash flow budget. In other words, it is a financial analysis, which is used to compare the timings of cash inflow and cash outflow. The company’s financial position can be affected by the cash flow because it clarifies the company’s liquidity and ability to pay the debts and expenses occurring from the business.