Importance of Cash

09 Nov Importance of Cash

 

Part 1: Importance of Cash

Generating cash is the ultimate responsibility for managers today. Cash and cash flow are considered the “lifeblood” of a business.

How important has cash generation been for your current company or a prior employer? How is cash generation different from the concept of profit and loss (P&L) in accounting? Provide an example of how a company manages cash flow.

Part 2: Application of Concepts/Financial Analysis

Review the materials in the link below. Based on the materials presented in this link, discuss why financial analysis is important in the overall understanding of the financial performance of a firm. Be specific and give examples based on your experience or research.

https://courses.lumenlearning.com/boundless-accounting/chapter/overview-of-financial-statement-analysis/

Instructions : 

 

Read and respond to 3 of your classmates’ posts. In your response to your classmates, consider comparing cash generation techniques at your company versus his or her company. Draw distinctions based on the industry and tell your colleagues why those distinctions are necessary for the management of cash flow. Below are additional suggestions on how to respond to your classmates’ discussions:

· Ask a probing question, substantiated with additional background information, evidence or research.

· Share an insight from having read your colleagues’ postings, synthesizing the information to provide new perspectives.

· Offer and support an alternative perspective using readings from the classroom or from your own research.

· Validate an idea with your own experience and additional research.

· Make a suggestion based on additional evidence drawn from readings or after synthesizing multiple postings.

· Expand on your colleagues’ postings by providing additional insights or contrasting perspectives based on readings and evidence.

1st Student Response (Ravi Teja Reddy) :

 

A Cash Flow can be determined as a bi-directional flow of Cash in and out of a business.  It is an important factor to determine whether a Company makes profit or loss. If for example the flow of cash flowing towards the Company is more than the cash going out of the company then it is said to be a positive cash flow. But the two terms are different in nature. I currently work for a Mortgage Company that offers Home Loans and Cash Flow is considered to be an important factor for the business to function. A positive flow of cash helps to run the payroll of all employees, pay the taxes, daily operations and pay other expenses. This also helps the company invest in some other business which will in turn create more employment and revenue (Barua, 2006).

However Cash Flow and Profit is not the same thing. After all the expenses have been carried out from a cash flow the surplus amount that is left over is called as the Profit. In Case of a negative Cash Flow, since the amount of Cash flowing into the Company is less than the amount of money spent by the company which also includes expenses, it is termed as a Loss.

In order to exercise control in compliance with the established restrictive conditions of liquidity and capital adequacy, we calculate the forecast values of the share of the owner’s equity furthermore cash flows. We learn that the budget required situation meets these conditions but remains also shows our thoughts about the constant reduction of capital capacity and the managed liquidity, as well as a reduction of the bonds share, because their past and exit levels are economically ineffective (Higgin, 1995). Noting that the Company’s announcement of cash flows has not yet held prepared by the accounting team also that, in his opinion, this statement would be important to the conclusion of an IPO. For example, although an adminstrator may only contribute several groups considering the form also mechanics regarding the record of cash flows, students will ought the chance to additional interest with capital flows through precise application that includes complex accounting standards seen throughout the course.

References:

Barua, A., Legoria, J., & Moffitt, J. S. (2006). Accruals Management to Achieve Earnings Benchmarks: A Comparison of Pre-managed Profit and Loss Firms. Journal of Business Finance & Accounting, 33(5/6), 653–670. https://doi.org/10.1111/j.1468-5957.2006.00017.

Higgins, R. C., & Reimers, M. (1995). Analysis for financial management (No. s 53). Chicago: Irwin.

2 nd Student Response (Monika Rallabandi) :

 

Part 1

Importance of Cash generated for a Company

For business to start off it needs cash to maintain the business. This the fluid that the business starts with for the initial investment like raw materials, stock maintenance, to purchase a place or lease it, salary for the workers and other operating costs that are required. It is the duty of the manager to take care of the cash which satisfies all the above-referenced needs.

In the organizations the cash generation can be known from the cash flow statement. This cash flow statement gives the information regarding the operating cash flow that is the cash generated from the operating procedure in the business. This will give you the information regarding the wellsprings of the cash that is available with the company, cash that is being utilized for a particular period time.

Profit and Loss Concept

Profit and loss statement is nothing yet the income statement that gives financial report of the company which gives information regarding income, costs, profit and loss of that company in a particular period. This will let you what is the sales that is generated, how the costs are managed and how the profits are created out this. The cash flow statement is not the same as the profit and loss statement.

For example:

If we have an ABC company and its cash flow from operating activities is $ 5000 capital use is $1500 then the free cash flow will be $3500. That is in the event that we deduct other charges to income from the total compensation by adding depreciation to it gives the cash flow in the business.

Part 2

Application of Concepts/Financial Analysis

Operating cash flow will have impact on the managerial decision making in the organizations. Along these lines, we need understand the cash flow statement to make great decision in the organization. In this cash flow you will have 3 categories one is operating cost that will give you the idea on the generation and sales of the item, then investment cost that is incurred in purchasing the fixed assets and finally the financial costs speaks about the value and obligations, the repayment of the obligation, cash inflow from the sales and the cash out flows to purchase the stock. This cash flow statement is included with balance at beginning of the year till year’s end and will have comparison on net increase or decrease in the cash and marketable protections. This distinction be equal to the beginning of the year to year’s end.

References

Myddelton, D. R. (2017). Cash flow statement. In The Meaning of Company Accounts (pp. 16-16). Routledge.

Von Mises, L. (2008). Profit and loss. Ludwig von Mises Institute.

Dodds, J. C. (2018). Managerial decision making. Routledge.

3rd Student Response (Anusha Chigurapati) :

 

Part 1: Importance of Cash Flow

Income is considered to be one of the simplest sectors of accomplishment, for a small and mid-sized business. Benefits are considered as insignificant without money. The problems of cash flow can be one of the main sources of displeasure for organizations. It’s fundamentally the development of assets all through your business. Which can be followed and screened either week by week, month to month or quarterly. Benefit in other words Profits doesn’t approach income. You can’t simply take a peek at your profit and Loss (P&L) and get it together on your income (O’Regan,2015). Numerous other budgetary considers feed along with calculating your income, including records of trades, liabilities, capital uses, and obligation administration. Even the business is not doing well, it is unsuccessful in managing the cash flow, then it is not easy to lead in the competitive world. Managing the cash flow benefits, the business owner to embark the liability problem.

Smart cash flow that executives requires a laser center around every one of these drivers of money, though to your profit or loss. Any business that is experiencing quick development can run into income issues also. Business development for the most part includes higher work costs as new representatives are bought, higher lease for extra space, higher promoting expenses, and progressively capital speculation for new offices etc.

Part 2: Application of Concepts/Financial Analysis

An organization’s financial analysis delivers cash related data that experts use to assess an organization’s financial deals. The information introduced in a financial report is necessary and the organization’s financial summaries are significant tool for future goals. By distributing fiscal reports, the board can speak with intrigued outside gatherings, for example, financial specialists, the news media and industry experts about its achievements running the organization. For example, in the occurrence that you had complete resources of $5,000,000 and $500,000 in real money, your money is 10% of your all out resources. In the same manner, on the off chance that your present liabilities were $10,00,000, at that point your liabilities are 50% of your all out resources.