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Explain the concerns a company that does not have a reliable cash flow forecast faces.

Explain the concerns a company that does not have a reliable cash flow forecast faces.

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Answer #1

A company that does not have a reliable cash flow forecast will not be able to assess its liquidity position. This implies that even though it may know its net income, it may not be able to assess the amount of cash available to meet its immediate liabilities. Knowing liquidity helps the management to arrange for any shortfalls in advance and to invest the excess cash wisely. Knowing the correct cash position will help management to plan and control the financial operations effectively. Together with ratio analysis, the cash flow analysis helps in measuring and comparing the profitability position of the business which a company with no access to reliable cash flows will be unable to do.

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