The SCFP (both on WC basis and on cash basis) highlights the changes in the net working capital in the period between two consecutive balance sheets and also the factors (or items) responsible for the changes. Throw a careful understanding of the SCFP, alongwith the financial statements, some of the important questions related to the financial transactions and decisions of the firm stand answered. Such questions are :
1A How come that net current assets have increased though there has been a net loss over the period ?
1B How have the net current assets gone down although the net income has gone up through the period ?
2A How were additions to plant and equipment financed ?
2B If plant and equipment had been sold, may be due to shrinking of operations,how were the sale proceeds used ?
2C Why should money be borrowed (or raised through issue of shares) to finance purchases of new plant and equipment when the cash flow (i.e. the aggregate of net income and depreciation) is more than sufficient for the purpose of the purchases ?
3A When assets have been procured out of increases in share capital, how were those assets put to use ?
3B How were the proceeds of any debt issues used or what were they employed (on) ?
3C How were debts retired, if so ?
4A How was the increase in WC financed ?
5A How was it possible to distribute dividends in excess of current earnings, or, even though there is a net loss over the period ?
5B Where did the profits go ?
5C Why could not have the dividends been larger ?
Besides enabling answers to come up for such questions, the preparation of SCFP helps in the following aspects too :
(a) To plan adequately for long-term funds for financing major fixed assets expansion.
(b) To plan on the relative employment of external sources of funds vis-a-vis the internal sources in the use of funds.
(c) To make the right dicisions in WC and cash management, e.g., increase in WC involves higher icterest costs, larger inventory accumulations (leading,possibly, also to obsolescence, theft, deterioration, etc.), locking up of receivables, too much of cash balances with accompanying risks. Also decrease in WC involves bottlenecks in, and slowing of, production activities and personnel idling off.
1A How come that net current assets have increased though there has been a net loss over the period ?
1B How have the net current assets gone down although the net income has gone up through the period ?
2A How were additions to plant and equipment financed ?
2B If plant and equipment had been sold, may be due to shrinking of operations,how were the sale proceeds used ?
2C Why should money be borrowed (or raised through issue of shares) to finance purchases of new plant and equipment when the cash flow (i.e. the aggregate of net income and depreciation) is more than sufficient for the purpose of the purchases ?
3A When assets have been procured out of increases in share capital, how were those assets put to use ?
3B How were the proceeds of any debt issues used or what were they employed (on) ?
3C How were debts retired, if so ?
4A How was the increase in WC financed ?
5A How was it possible to distribute dividends in excess of current earnings, or, even though there is a net loss over the period ?
5B Where did the profits go ?
5C Why could not have the dividends been larger ?
Besides enabling answers to come up for such questions, the preparation of SCFP helps in the following aspects too :
(a) To plan adequately for long-term funds for financing major fixed assets expansion.
(b) To plan on the relative employment of external sources of funds vis-a-vis the internal sources in the use of funds.
(c) To make the right dicisions in WC and cash management, e.g., increase in WC involves higher icterest costs, larger inventory accumulations (leading,possibly, also to obsolescence, theft, deterioration, etc.), locking up of receivables, too much of cash balances with accompanying risks. Also decrease in WC involves bottlenecks in, and slowing of, production activities and personnel idling off.
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