Cash Flow Analysis (ePub)

Cash flow refers to the total amount of cash-equivalents or real
cash that moves in and out of business. Cash flow can be
either positive or negative. Positive cash flow refers to increase
in the liquid assets of a company, which will make it easy for
the said company to take care of its financial obligations, like
saving 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 asset
of the company is on the decline, which may make it
impossible for the company to settle its various financial
obligations. There is a difference between net cash flow and net
income; the latter can include items for which the company has
not received payment and account receivable. The quality of the
income owned by a company can be assessed using cash flow
phenomenon. It refers to how liquid the income is, and can
give an insight into the possibility of the company remaining
solvent.
Accrual accounting is one of the many aspects of cash flow
analysis, and it enables a company to count their chickens
before they hatch; this is because accrual accounting considers
credit when calculating the income of the company. In this
situation, the company can add settlement due from customers
and accounts receivable as part of the items on its balance
sheet. 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 its
long-term assets. The company will, therefore, increase its
liquidity, but at the same time, it will be limiting its growth
potential in the long term; in such a situation, the company
may be preparing itself for failure. A company can also borrow
money and issue bonds to increase liquidity, but the outcome
may also not be palatable in the long run. When considering
the true state of a company, therefore, it is better to consider
both the income statement and the cash flow statement of the
company together.
Cash Flow Statement
This is also referred to as the statement of cash flow. This
statement can adequately show if the income of the company is
languishing or not, considering the number of IOUs in the
statement. Having a high number of IOUs is never a
sustainable situation for any company in the long term; neither
does it translate into an increase in cash flow. Lack of
cash-equivalent and real cash for settling short-term liabilities
can render a company insolvent even if the company is very
profitable. The company may not have the liquid cash for
survival in the case of a lawsuit or business downturn if the
profit recorded by the company is tied up in inventory, prepaid
expenses and accounts receivable. The quality of a company's
income is determined by cash flow. The company should be
deeply concerned if its net income is less than its cash flow.
Cash flow statement can be categorised into three, as
highlighted below
1. Financing cash flow
2. Investing cash flow and
3. Operating cash flow
Operating cash flow represents cash flow that relates to the
day-to-day operations of the company. Investing Cash Flow
talks about the acquisitions and other investments of the
company. The investment can be long-term or short-term; good
examples of long-term investments are securities and towers for
a telecommunication service provider. On the other hand,