Day 192 Cash is king

Cash is king

When investors determine the value of a company’s share price, the cash flow is one of the most crucial factors that is taken into consideration. According to the statistics over small and medium-sized entities, their survivals were threatened by the classic killer of business, the insufficient cash flows. The typical victim of the cash flow issues is the One. Tel Ltd, which suffered an immense amount of deficit of cash while maintaining a high volume of profit and stock price. The collapse of it emphasized the importance of liquidity once again. As an accountant, we must be able to provide reliable cash flow statement in order to successfully communicate accurate information towards external/internal users. And consequently, they will be able to make relevant decisions base on that.

Investors, managers and other interested parties, require the statement of cash flows due to the following reasons. Firstly, it indicates the business’ ability to generate future cash flows. The users of the report will be able to identify the major source of cash inflows and outflows. Since cash is needed to settle the daily transactions, plus supply fund for investment, it is a critical issue for the entity to maintain an adequate level of cash reserve. In addition, the statement defines the entity’s ability to pay out cash dividends, debts and other obligations. If a business’s cash flow statements presents the problem of low level of cash, the related parties epically the investors will question about the possibility of the risk that business would not be able to pay its bills. Moreover, the users of the statement may determine the difference between the profit and operating cash flow. In our previous example, One. Tel. Ltd. incurred the problem of this tremendous gap in these two figures. In fact, a healthy and sustainable stream of cash flow correlated with the profit to determine the business’ status. A company may raise a lot of cash by selling non-current asset, which is not likely to continue in the next period. In contrast, company that makes a huge profit over credit sales also faces the potential threat of fund chain fracture. Furthermore, the users of the statement will obtain a better understand of the changes in liability and equity account through the study of investment and financial cash flow activities.

In conclusion, the cash flow statement provides a systematical report of the business’ cash reserves condition. Hence it is crucial for us to comprehend this useful tool in financial accounting.