IMPLICATIONS OF FUNDS STATEMENT ANALYSIS
The analysis of funds statements gives us insight into the financial operations of a firm that will be especially valuable to you if you assume the role of a financial manager examining past and future expansion plans of the firm and their impact on liquidity. Imbalances in uses of funds can be detected and appropriate actions undertaken. For example, an analysis spanning the past several might reveal a growth in inventories out of proportion with the growth of other assets or with sales. Upon analysis, you might find that the problem was due to inefficiencies in inventory management. Thus, a funds statement alerts you to problems that you can analyze i0n detail and take proper actions to correct.
Another use of funds statements is in the evaluation of the firmâ€™s financing. An analysis of the major sources of funds in the past reveals what portions of the firmâ€™s growth were financed internally and externally. In evaluating the firmâ€™s financing, you will want to evaluate the ratio of dividends to earnings relative to the firmâ€™s total need for funds.
Funds statements are also useful in judging whether the firm has expanded at too fast a rate and whether the firmâ€™s financing capability is strained. You can determine if trade credit from suppliers (accounts payable) has increased out of proportion to increases in current assets and to sales. If trade credit has increased at a significantly faster rate, you would wish to evaluate the consequences of increased slowness in trade payments on the credit standing of the firm and its ability to finance in the future. It is also revealing to analyze the mix of short-and long-term financing in relation to the funds needs of the firm. If these needs are primarily for fixed assets and permanent increases in current assets, you might be disturbed if a significant portion of total financing came from short-term sources.
An analysis of a funds statement for the future will be extremely valuable to the financial manager in planning intermediate and long term financing of the firm. It reveals the firmâ€™s total prospective need for funds, the expected timing of these needs, and their natureâ€”that is, whether the increased investment is primarily for inventories, fixed assets, and so forth. Given this information, along with the expected changes in trade payables and the various accruals, the firmâ€™s financing can be arranged more effectively. In addition, the finance manager can determine the expected closing cash position of the firm simply by adjusting the beginning cash balance for the change in cash reflected on the projected sources. In essence, the projected change in cash is a residual one. Alternatively, future cash positions of the firm through a cash budget can be forecast, where direct estimates of the future cash flows are made.
Statement of Cash Flows
The purposes of the statements of cash flows is to report a firm cashâ€™s inflows and outflows, during a period of time, segregate into three categories: operating, investing and financing activities. This should help the financial managers to access and identify
* A companyâ€™s ability to generate future net cash inflows from operation to pay debts, interest, and dividends.
* A companyâ€™s need for external financing.
* The reasons for differences between net income and net cash flow from operating activities.
* The effects of cash and non-cash investing and financing transactions.
The financial analysis reports not only act as a feedback to finance manager and management on companyâ€™s performance but also enable them how to plan cash flows for future so that the company may not land into a financial crisis but the timely availability of funds ensures the planned growth and consequent increase in revenues.