There are various indicators that reflect the financial condition, position and performance of a company and its management at a specific point of time. The financial statements of a company provide these indicators as a gauge for the performance of a company and its management. Out of all these financial statements the statement of cash flows is most important and presents the cash inflows and outflows of a company during a period of time which is usually one year. Although the profitability and position of the company with reference to its assets and liabilities is important, the statement of cash flows is given much importance due to the fact that it presents a more practical and real approach to the financial position of a company. The most important factor for users of financial statements of a company is the ability of a company to generate cash flows during a specific period of time.
The importance of cash flows becomes more apparent in the wake of recent financial crisis which started in 2008 due to subprime mortgages in the U.S and spread throughout the world. The main reason for this financial crisis which caused many banks and financial institutions to go bankrupt was not the profitability of these organisations but the liquidity crunch these companies faced. Liquidity crunch is not the result of low profits or huge losses but is the aftermath of mismanagement of cash flows. The banks reported high profits but the cash inflows were not managed efficiently to cope with future operational requirements. The need for speeding up cash flows is more important now than it was before to cope with the deteriorating financial conditions throughout the world.
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