Essay: Cash Flows in Small and Large Businesses

Essay: Cash Flows in Small and Large Businesses
11/04/2011 Comments Off on Essay: Cash Flows in Small and Large Businesses Academic Papers on Business Studies,Sample Academic Papers admin

Sample Essay

The cash flows play an important role in all businesses whether large or small and have a direct impact on a company’s performance and overall operations. The importance of cash flows as discussed earlier is relevant for both small and large firms. Small and developing firms have various problems and issues related to cash flows such as availability of development finance and managing running cash flows.

The small businesses which are usually at an early stage of operation have difficulty in raising cash required for research and development. As the company progresses and starts earning profits the amount of free cash flows starts increasing and in the later stages the company can start utilising this free cash flow in various investments (Danson 1996).

There is also a factor of mismanagement of free cash flows in smaller firms as small business owners do not give much importance to techniques based on free cash flows. The investment decisions are usually based on intuition and feeling. There is a high level of uncertainty in cash flows of smaller firms as compared to large ones as the flow of business and sales are quite unstable. The sales may rise rapidly and then decline to a lower level due to various factors. Larger corporations are quite stable in terms of consistent sales and cash flows (Moore 2008).

The cash flows in a large company directly impact its operations and investment decisions and research and development expenditures. As these companies have grown significantly and have a large financial structure they tend to utilise free cash flows in various investments. Although a large of amount of free cash represents a good financial position of the company but there is also a danger that the free cash flow could be invested poorly. As the high level of cash would tempt the managers to make decisions based on personal utility rather than shareholders’ value. The position of cash flows in larger firms is much better than that in smaller firms but there is a problem of mismanagement of the free cash flows and risky investment decisions by managers (Oler and Piconi 2005).

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