i) It explains the financial consequences of business operation. Funds flow statement provide a ready answer to so many conflicting situation such as ;
a) Why the liquid position of the business is becoming more and more unbalanced in spite of business making more and more profit ?
b) How was it possible to distribute dividends in excess of current earning or in the presence of a net loss for the period ?
c) How the business could have good liquid position in spite of business making losses or acquisition of fixed assets ?
d) Where have the profits gone ?
Defined answers to these questions will help the financial analyst in advising the employer/ client to direct the fund to the channels which will be most profitable for thee business.
ii) It answers intricate queries: – The financial analyst can find out answer to a number of intricate questions-
a) What is the overall credit worthiness of the enterprise?
b) What are the sources of repayment of loan taken?
c) How much funds are generated through normal business operation?
d) In what ways the management has utilized the fund in the past and what are going to be likely use of funds?
iii) It acts as instruments for allocation of resources. – A projected fund flow statement will help the analyst in finding out how the management is going to allocate scarce resources for meeting the productive requirement of business. The funds should be managed in such a way that the business is in a position to make payment of interest and loan installments as per the agreed schedule.
iv) It is a test as to effective or otherwise use of working capital- The adequacy or inadequacy of working capital will tell the financial analyst about the possible steps that the management should take for effective use of surplus working capital or more arrangement in case of inadequacy of working capital.