Well, cash flow is an important part of a business, that’s true, but does it tell us more about the performance and future of a company than the income statement and balance sheet? According to recent surveys, corporate security analysts, government agencies, financial writers, and accounting policymakers have accepted that cash flow is one of the most important information published in financial statements. But how adequate of a yardstick can be while operating cash flow? Not very, right? When 290 companies were analyzed, 60 were declared bankrupt, and it was found that cash flow data from five years cannot distinguish between a healthy business and one that will fail. Operating cash flow was not able to predict or forecast the future as effectively as the combination of crucial accrual measures, including debt-to-equity and profitability ratios. In these scenarios, the question arises: ‘Is cash flow the right indicator?’ Cash flow is reliable and does help you assess your debt and net income capability; it is indeed important, but not always the most reliable factor when determining a company’s capacity.
If you are managing taxes, clients’ accounts, cash flow, and financial records on your own, contact an outsourced CPA in Tampa, FL, right away.
Table of Contents
What Exactly is Cash Flow?
The term “cash flow” refers to the net amount of money that enters and leaves a company or an individual in the finance industry. It is a crucial business component that enables people to fulfill their financial commitments and make low-risk investments for the years to come. It’s the difference between total income and expenses, also referred to as the account balance for financing operations. Though income and expenses are weighed to define a company’s total worth of cash flow, their assets and liabilities are also considered. It’s believed that cash flow can be a crucial factor in assessing the company’s future and investment decisions. It is true, though cash flow alone cannot provide an accurate assessment of a company’s worth.
What’s Operating Cash Flow?
Operating cash flow is an important element, different from generic cash flow. It’s the net cash flow generated by an individual or business, excluding all the assets, liabilities, investments, and financing. Operating cash flow is a core measure of how much an organization generates through its ongoing operations and functions. Since operating cash flow tells the organization’s ability to yield revenue and is limited to current business activities, it does inform an investor or buyer about the financial performance of the company.
What Doesn’t Cash Flow Tell Us?
Cash flow doesn’t tell you about a business’s assets and liabilities, often shown in the balance sheet. If your company uses a debit and credit system for bookkeeping, the amount payable or receivable, i.e., the due invoices, each of which is sizable, are not reflected in the cash flow statement. It does not account for the profit or loss incurred, as profitability also links back to the cash earned and non-cash items. It does inform you about the finances of the company, but it is not an indicator of the overall well-being of the company. It means one cannot solely rely on the cash flow statement when investing in or funding a startup business; other aspects must also be considered. Factors such as equity shares, stakeholders’ ownership, debt collectibility, loans, initial investment, return on investment over the years, revenue model, management systems, compliance regulations, financial records, taxation, and location are vital. Cash flow can tell you about your competitor’s business and whether they are thriving, but it can’t assess their business’s worth.