Cash Flow - The Oil That Keeps the Small and Family Business Organization Running Smoothly*

Authors

  • Andrew J. Potts University of Southern Maine

Abstract

The purpose of this paper is to emphasize the importance of cashflow and the purposes of uses of the Statement of Cash Flows. Two different methods of calculating cash flows from operations are presented along with a discussion of ways to interpret cashflows and how to plan for future activity. The importance of cashflow should be clear to the financial manager whether the business entity be a small family business or a major corporation. A shortage of cashflow could result in the loss of valuable trade discounts or, in extreme circumstances, f 1NJ11Cial embarrassment and bankruptcy. While a cash surplus does not necessarily translate into greater returns to owners, it certainly provides opportunities/or prospective buyers who understand how to utilize positive cash flows. The caveat for interpreting cash flow is the same as that used for net income: quality counts. This means that firms that depend heavily on depreciation to generate cash flow are not looked on as favorably as firms that have a preponderance of cash flow from operations.  Furthermore, cash flow should be analyzed to make certain that the company is investing properly in order to maintain future operations. Managers who attempt to improve cash flow artificially by ignoring necessary investments in plant and equipment may not be familiar with the concepts of cashflow.

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References

FASB (1987). "Statement of Cash Rows,"Sratement of Financial Accounting Standards No. 95,

Stamfool, Conn.

Small Business Administration (August, 1988). SBA: What ii is...What it does, Publication

OPI-6, Washington, D. C.: Office of Public Information.

"Steps to Starting a Business," (1986). Small Buswss Reporter 10, 1986 3.

Published

1993-06-09

Issue

Section

Special Section