Cashflow emerges as a significant concept to understand when anorganization is evaluating its overall financial health. The conceptof cash flow describes the actual inflows as well as outflows ofresources from an organization. Cash flow has been indicated as anexceedingly important concept by businesses as a measure of thefinancial condition of businesses because it eliminates the effectsof accounting techniques, and tends to bring a clearer view of theoutflows and inflows of resources in a given organization.
Theconcept of cash flow is also important in measuring the financialcondition of a business because it emerges as a useful tool inunderstanding the impact of a new project or investment on thefinances of an organization. Also, the cash flow is critical inmeasuring the financial condition of a business it tends to eliminateall the accounting adjustments, which emerge on the income statementfor example, depreciation and deferred income taxes. In this view,cash flow allows individuals analyzing the performance of anorganization to have a better view of an organization’s earningpower as well as operating success.
Furthermore,cash flow has emerged as an important measure of an organization’sfinancial condition because it helps an organization in making thedecision of whether to continue into the long-term or quitoperations. Since cash flow aids in bringing out the true value of abusiness in terms of inflows and outflows, it is possible for anorganization to establish whether it would be worth continuing withthe operations or it would be better to quit the operations. Thiswould usually be based on whether an organization has a positive or anegative cash flow.