Introduction This chapter presents the findings and main points which come the from ratio and…
Dissertation: Cash Flows
Dissertation: Cash Flows
In order to understand the ways in which companies manage and speed up their cash flows we need to understand the basic concept of cash flows. Cash flow is one of the most important factors which highlight the financial condition of a company. Though the objective of every business is same which is earning profits but in order to operate and manage the business on a day to day basis the cash flows play a very important role and every business needs to manage them properly. A steady stream of cash flows is necessary not only for the operational requirements of a business but the business may also require extra cash from time to time to take care of investments and payments of any long term liabilities (Stewart 1991).
Cash flow as the name suggests is the total amount of cash inflow and outflow during a specific period of time. Though this is a personal finance perspective of cash flows it is quite similar and applicable in small and large organisations. A company receives cash from various sources and pays cash for various obligations. The company may receive cash from selling goods or providing services, receiving amount due from credit customers and if there is an adverse shortage of cash the company may also sell off some of its noncurrent assets. The regular cash payments of a company consist of payments to suppliers, payroll allocation, operational expenses and any other liabilities which may arise out of business operations. The cash flow of a company is the total of outflows and inflows of cash in a business. The company requires cash to pay for various operational activities such as paying salaries, rent, bills and suppliers which are referred to as outflows. The company receives cash from various sources such as converting assets into cash, borrowing money, selling equity and selling products; this receipt of cash is termed as cash inflow. The total inflows and outflows are calculated to arrive at the cash flow of a company (Kapoor, Dlabay and Hughes 2004).
The cash flow is quite different from the profit of a company as the profit represents the total earnings the company has made during a period, but it does not necessarily mean that this amount will be received as cash because both of these items differ due to timing differences. The revenue a company generates may not be equal to the cash generated by the company. The company may earn revenues today but the inflow of cash from these revenues may come at a later stage and the same concept applies to expenses. When a company sells goods or provides services to its customers on credit the company earns a profit on these goods or services but the cash flow from the sale may come at a later stage while on the other hand the company may use or consume some resources the payment for which may be due at a later stage and this would create a timing difference between the actual expense and the cash payment related to that expense. This entails that the cash flows of a company are also important along with the profit or loss of a company for decision makers (Reider and Heyler 2002).