Dissertation: Importance of Cash Flows

Dissertation: Importance of Cash Flows
11/04/2011 Comments Off on Dissertation: Importance of Cash Flows Academic Papers on Business Studies,Sample Academic Papers admin

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 company needs not only to calculate the profitability for a particular period of time and the financial position at a certain date, it also needs to calculate the cash flows of a certain period to determine cash management and efficiency of utilizing cash during a period. One interpretation of cash flows suggests that for any company “Net income is just an opinion, but cash flow is a fact” (Fernandes 2008 p. 1). This means that cash flows are much more important in the success of a company than the profit or earnings.

The profits are though important but the cash flows are necessary to perform various business operations, purchase raw material for production and for various other inputs in the business. According to Reider and Heyler (2002) “Cash is the fuel that powers the company….cash is the lifeblood of the organization” (p. 8-12) which means that without cash the company cannot perform basic functions required to run the business smoothly and effectively. The most necessary asset to operate a large or small business is cash as all direct and indirect operations in a firm are related to cash. Cash flows serve as the most important element in a business whether it is a manufacturing, trading or service business.

The cash flow is given much importance in an organization as without it the company cannot survive. The cash flow provides a reality check on a company’s financial position. There may be some losses in the early years of a business or during the course of business but a company can recover from these losses in subsequent years, but if there is a shortfall in cash the company may have to rely on undesired sources of cash which may impact the long-term growth of the company. This implies the importance of cash flows for any organization whether it is a manufacturing, trading or service business (Berman, Knight and Case 2006).

According to Owen (2003), “A company without cash cannot buy the people, materials or equipment it needs and without these, a profit cannot be earned” (p.102). This further strengthens the fact that cash is much more important than profit and profits cannot be made without a proper cash management system implemented in a company. The importance of cash supersedes the importance of profits in a company. The income statement of a company may show a huge amount of profits but the cash flow statement reflects the actual level of cash received and paid during a specific period.

Sharon Cloud (2009) stated that “As credit tightens and the economy slows a company’s cash flow becomes a major focus” [Online]. Whenever the economy of a country or a company faces adverse conditions the need and demand for cash rises. The financial crisis which started in 2008 created a credit crunch in the entire United States and world economy where the demand for cash grew higher and companies and financial institutions with cash deficiencies failed miserably. In light of this financial crisis, the importance of cash flows has become all the more relevant for businesses and companies where the need to apply efficient cash management techniques to business operations has become more important.

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