Cash flow position of a concern affects the following concepts of financial management.
A. Capital Budgeting Decision
B. Capital Structure
C. Fixed Capital Requirement
D. Financing Decision
E. Dividend Decision
Choose the correct answer from the options given below :
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → A, B, D and E only
Cash flow means the cash coming in and going out of the business. It is a factor in four of these decisions.
(A) Capital Budgeting Decision — Affected by cash flow (Correct). Before investing in a project, the firm studies the cash flows of the project, that is, the cash it will bring in and pay out over its life.
(B) Capital Structure — Affected by cash flow (Correct). Cash flow position is the first factor in choosing the capital structure. The firm must have enough cash to pay interest and repay loans before it borrows.
(C) Fixed Capital Requirement — Not affected by cash flow (Incorrect). The need for fixed capital depends on the nature of the business, the scale of operations, the technique of production, growth plans and so on. Cash flow position is not in this list.
(D) Financing Decision — Affected by cash flow (Correct). A stronger cash flow position makes borrowing (debt) a better choice than raising money through shares.
(E) Dividend Decision — Affected by cash flow (Correct). Paying dividend means paying out cash. A company may earn profit but be short of cash. So the cash flow position decides how much dividend it can pay.
NCERT (2026-27 Edition): “Cash flows of the project: When a company takes an investment decision involving huge amount it expects to generate some cash flows over a period. These cash flows are in the form of a series of cash receipts and payments over the life of an investment. The amount of these cash flows should be carefully analysed before considering a capital budgeting decision.” “Cash Flow Position: Size of projected cash flows must be considered before borrowing. Cash flows must not only cover fixed cash payment obligations but there must be sufficient buffer also. …” “Cash Flow Position of the Company: A stronger cash flow position may make debt financing more viable than funding through equity.” “Cash Flow Position: The payment of dividend involves an outflow of cash. A company may be earning profit but may be short on cash. Availability of enough cash in the company is necessary for declaration of dividend.” |