What is the purpose of cash flow analysis?

Cash flow analysis is primarily focused on assessing the inflow and outflow of cash within a business over a specific period. This involves reviewing all cash-related activities, such as revenues received from sales, cash disbursed for expenses, and changes in cash position. By conducting this analysis, businesses can understand their liquidity, ensuring they have enough cash to meet obligations as they arise. It is crucial in helping management make informed decisions about operations, future investments, and financial stability.

While evaluating long-term investments, determining profitability, and analyzing stock performance are essential components of financial analysis, they do not directly address the core purpose of cash flow analysis, which focuses on the actual movement of cash. Investors and managers utilize cash flow analysis to monitor financial health and plan accordingly, making it a vital tool for successful business management.