Limitations of Cash Flows
Not appropriate for judging the liquidity
Cash flow does not represent an honest picture of the liquidity of a company or a business because liquidity does not depend solely on money. It also depends upon those assets that can be changed into cash easily. The absence of these assets makes it difficult to accurately describe the firm's capacity to satisfy its commitments or obligations when they are due.
Overlooks non-cash transactions
The cash flow statement ignores transactions that do not include cash, such as the purchase of fixed assets. Therefore, the true position of a company cannot be determined by a cash-flow statement.
Possibilities of window-dressing
The likelihood of window-dressing is greater in the event of a cash situation than in the case of a working capital position. The cash balance can be readily controlled or changed by postponing purchases and other payments and swiftly gathering cash from debtors before the balance date.
Fails in presenting the net profit
A cash flow statement does not show a company’s net income for the duration as it disregards all non-cash items or transactions that do not include any cash, which is considered by the profit and loss statement. The cash flow statement does not necessarily determine profitability as it does not consider the cost of revenues. However, it can be utilized as an addition to the income statement.
Industry comparison is impossible
A cash flow statement doesn’t estimate the financial footing of a company. Therefore, comparison with other similar industries is not possible.