The Importance of Cash flow to a Corporation Khodeja Begum FIN 510 WEEK 2 DISCUSSION POST DAVENPORT UNIVERSITY

ABSTRACT For week two, I wanted to write about the importance of cash flow to a corporation, which is as important as balance sheet, income statement, and the statement of stockholders' equity. Corporation can continue to trade for short term or long term even if there is huge debt due to business loss. This can be possible only possible if the corporation decides to delay paying creditors or simply pay the costs. However, no business can survive without out their immediate needs, which can only happen if there is enough cash flowing. For this paper I will talk about the importance of cash flow to a corporation.

First of all, cash flow is defined as a vital importance to the health of a business, that being said it is better to have large inflows of revenue from sales then out flows, the most important focus for a business is cash flow (The times 100. 1995-2014). The way cash flows into the business (cash inflows), is mostly by selling goods and services. The way cash flows out (cash outflows) is over expenditure of raw materials, transport, labour, and power. The difference between the two is called the net cash flow (The times 100.1995-2014). These sources and importance of cash flow is described as the following: one, operating activities: Indicates a company's operating cash expenses and revenue, the derivative of which is the operating cash flow (OCF). Two, investing activities: Indicates the dynamics in cash from the purchase or sale of company assets. Three, financing activities: Indicates cash point changes from the purchase of a companys own stock or issue of bonds, and payments of interest and dividends to shareholders (GlobeInvestors, 2013). And four, Supplemental information: Includes everything that does not belong to other categories (GlobeInvestors, 2013). The way corporations are able to generate this cash flow is by increasing their inflow (revenue) or decreasing their outflow (expenses) of cash within a specified period of time. This then will be considered to be a positive cash flow. In contrast, if a company demands for more cash inflow due to high expenses will then need more cash flow but may be unable to pay for it; this income will therefore be a negative cash flow. The companys financial are represented by a companys statement of cash flow. The companys statement identifies cash out flow due to the companies expenditure (cash inflow), to earning of cash over time period. working capital accounts on the balance sheet (receivables, payables, inventories), the operating cash flow section shows how cash was generated during the period. It is this translation process from accrual accounting to cash accounting that makes the operating cash flow statement so important (GlobeInvestors, 2013). There are many ways that companies can use to enhance their cash flow. For instance, last week I discussed the type of business ownership with legal rights and the legal methods used by these corporations to increase their business. One of these corporations is called Partnered ownership. Having shareholder investments can eventually increase business income flow. Among others are marketing for companies to increase its business or simply market for donations to the company. It is very important for any business or a company to maintain its necessary cash flow. A stable company has the luxury by having excess cash flow helps the company operate in a strategic, proactive way, rather than a reactive, defensive way (Kokemuller, 2012). If a stable company continues to do a good job in financing and marketing their goods, then more cash flow will flow in rather than falling behind during disasters and having increased cash outflow. This also protects them from foreclosures as well as outstanding debts. The ability to generate positive cash for any company is to maintain their Finally the importance of having a positive cash flow can not only help in unexpected events, but also can help the company grow and become essentially powerful. One of the methods that a company may apply is, taking low interest loans whenever possible and avoiding high interest loans. It is very important to read the contract and understand the requirements before signing any loans. Some loans

only give little time for repayment, which may be impossible if the company is not doing well. This then will lead to accumulation of loans, and essentially lead late fees which increase the bill hence increasing the cash outflow. While other loans have high interest rates that double up what you initially owe. There are many loan providers out there that may lower your interested rate due to many circumstances, for example, the type of company you have, or being a hose owner etc. Therefore conducting research before signing any loans would be a great idea. After conducting research and fining the bank of interest that you want to get your loans from. The rules and regulation of a companys debt obligations are met, and the company finds it fare, the shareholders can further their decision on investing money. Second method a company can utilize is avoiding too many expenders on good and resources. Finally, a company may also decrease the staff in order to avoid over paying or to save money. Lastly, a companys aim is to maintain an increase of their incomes by decreasing their debts. Sometimes a company may hold too much cash; they might have borrowed for certain circumstances. However borrowing too much cash does not always end up in profit, so holding too much cash could mean potential losses of earnings. This situation is referred to as the liquidity position of the business. (The times 100. 2014) Profitability doesnt equate to a companys liquidity because a profitable can still continue its business (if there were to be a business loss) if the company has maintained good cash flow over time. In conclusion, for a medium company or small company, the most important thing for these companies is the cash flow. Being able to maintain cash flow, controlling cash and proper management are also very essential these companies. As velocity and altitude are typically the two most important gauges for a pilot, for the owner of an SME (medium sized enterprise), it is usually profitability and cash flow. Too often, SME owners will neglect cash flow. This may result in the business equivalent of crashing an aircraft into a mountainside (Les Nemethy, 2014). Therefore no small or medium sized company can afford to fall behind, be in greater debt and loos its business. These Companies focus is on investment and increasing the cash flow while minimizing debt.

References: The times 100. (2014). Importance of Cash flow business case study. Retrieved January 14, 2014 from http://businesscasestudies.co.uk/cima/controlling-cash-flow-for-business-growth/the-importance-ofcash-flow.html#ixzz2qRmdh5bq GlobeInvestor.com (11/2013). Retrieved January 14, 2014 from http://www.theglobeandmail.com/report-on-business/small-business/sb-money/cash-flow/theimportance-of-operating-cash-flow-for-small-businesses/article15134561/ Les Nemethy(2014), Importance of Cash Flow. In Warsaw Business Journal, Retrieved January 14th, 2014 from http://www.wbj.pl/blog/Corporate_Finance/post-331-the-importance-of-cash-flow.htm Neil Kokemuller.(9/2012). Importance of Cash Flow. In Demand Media, Retrieved January 14, 2014 from http://smallbusiness.chron.com/importance-cash-flow-business-57376.html