Flanagan joined the Clarets in the summer on a season-long deal in the hope of recovering his full fitness and featuring regularly again in the Premier League following 20 months out with a serious knee injury.
However, he has struggled for action in Dyche’s side in the first half of the campaign, making just six appearances with only three Premier League starts.
The 24-year-old was a key player for the Reds under old boss Brendan Rodgers and starred at left-back in the 2013-14 season when the Merseysiders narrowly missed out on the title.
His development has been severely restricted by injuries since although he did sign a new long-term deal at Anfield before he joined Burnley in the summer.
Dyche revealed he could be sent back to Liverpool if he considers he has enough cover in defence at Turf Moor.
“Football’s changed, it’s not just on the pitch now, there’s lots of different management things you need to look at and monitoring their contractual situation,” he said.
“Whether it’s a loan player, a player under contract or your contract needs extending, there’s a lot more that goes on than just people think.
“We’ll monitor [Flanagan’s] situation and him with us, there’s always their angle as well, it’s not just mine.”
If Flanagan does return to Anfield he is likely to struggle to force his way into Jurgen Klopp’s side although if he does recover his old form he could be used as an alternative to James Milner or Alberto Moreno at left-back.
Rangers striker Jason Cummings insists he is ready for his Old Firm baptism as he pleaded with boss Graeme Murty to let him loose on Celtic.