Cash Flow Analysis is the process of examining the actual inflows and outflows of cash and cash equivalents within a business over a specific period.

✅ Explanation:

Cash Flow Analysis involves evaluating a cash flow statement, which is a financial report that shows how cash is generated and used in operating, investing, and financing activities during a particular accounting period. It helps assess a company’s liquidity, solvency, and financial flexibility.

🔍 Key Components of Cash Flow Statement:

1. Operating Activities:

   • Core business operations like sales, purchases, and expenses.

   • Includes cash received from customers and cash paid to suppliers and employees.

   • Adjusted for non-cash items like depreciation and changes in working capital.

2. Investing Activities:

   • Purchase or sale of long-term assets like machinery, land, or investments.

   • Reflects a company’s growth strategy and asset management.

3. Financing Activities:

   • Cash flows from raising capital or repaying it.

   • Includes issuing shares, borrowing/repaying loans, and paying dividends.

Cash Flow Statement also includes Cash Equivalents statement

✅ Importance of Cash Flow Analysis:

• • Helps in cash management: Cash flow analysis tracks cash inflows and outflows, helping avoid shortages or idle cash.

  • Helps in external financial management: Lenders and investors assess a company’s cash flow to evaluate creditworthiness and investment potential.

  • Helps in internal financial management: Management uses cash flow data for budgeting, forecasting, and operational planning.

  • Discloses the movements of cash: The core purpose of cash flow analysis is to show where cash comes from and where it goes.

❌ Why it differs from Funds Flow Analysis:

Cash Flow Analysis examines the movement of cash in and out of a business through operating, investing, and financing activities, helping evaluate its liquidity and financial stability.