Cash Flow Analysis - E-book - ePub

Cash flow refers to the total amount of cash-equivalents or realcash that moves in and out of business. Cash flow can beeither positive or negative. Positive cash flow refers to increasein the liquid assets of a company, which will make it easy forthe said company to take care of its financial obligations, likesaving for the future, paying expenses, paying shareholders, reinvesting in the business, settling debts, and so on.
Negative cash flow, on the other hand, means the liquid assetof the company is on the decline, which may make itimpossible for the company to settle its various financialobligations. There is a difference between net cash flow and netincome; the latter can include items for which the company hasnot received payment and account receivable. The quality of theincome owned by a company can be assessed using cash flowphenomenon.
It refers to how liquid the income is, and cangive an insight into the possibility of the company remainingsolvent. Accrual accounting is one of the many aspects of cash flowanalysis, and it enables a company to count their chickensbefore they hatch; this is because accrual accounting considerscredit when calculating the income of the company. In thissituation, the company can add settlement due from customersand accounts receivable as part of the items on its balancesheet.
These may not count as cash, but they are added, anyway, as part of the cash flow of the company. Cash inflow of a company can also be from the sales of itslong-term assets. The company will, therefore, increase itsliquidity, but at the same time, it will be limiting its growthpotential in the long term; in such a situation, the companymay be preparing itself for failure. A company can also borrowmoney and issue bonds to increase liquidity, but the outcomemay also not be palatable in the long run.
When consideringthe true state of a company, therefore, it is better to considerboth the income statement and the cash flow statement of thecompany together. Cash Flow StatementThis is also referred to as the statement of cash flow. Thisstatement can adequately show if the income of the company islanguishing or not, considering the number of IOUs in thestatement. Having a high number of IOUs is never asustainable situation for any company in the long term; neitherdoes it translate into an increase in cash flow.
Lack ofcash-equivalent and real cash for settling short-term liabilitiescan render a company insolvent even if the company is veryprofitable. The company may not have the liquid cash forsurvival in the case of a lawsuit or business downturn if theprofit recorded by the company is tied up in inventory, prepaidexpenses and accounts receivable. The quality of a company'sincome is determined by cash flow.
The company should bedeeply concerned if its net income is less than its cash flow. Cash flow statement can be categorised into three, ashighlighted below1. Financing cash flow2. Investing cash flow and3. Operating cash flowOperating cash flow represents cash flow that relates to theday-to-day operations of the company. Investing Cash Flowtalks about the acquisitions and other investments of thecompany.
The investment can be long-term or short-term; goodexamples of long-term investments are securities and towers fora telecommunication service provider. On the other hand,