The potential of a company to generate higher earnings is quite important in today’s competitive world but the importance of cash flows and the ability to speed up cash flows is more important. The earnings of a company can be manipulated by various means as was the case with Enron and WorldCom, the two companies which declared bankruptcy in 2001 and 2002 respectively. Both of these companies manipulated earnings to cause the stock prices to increase without much consideration on the actual cash flows of the company.
The cash flow of a company depicts the actual position of a company with respect to liquidity and the inflows and outflows during a particular period of time. The speed of these cash flows is quite important as the early receipt and delayed payment of cash give a company a significant margin and time to invest this cash flow for profitable means and generate more cash flows for future operations. The three areas where cash is used or is generated includes cash from operating activities, cash from investing activities and cash from financing activities. Out of these three areas cash from operations is the most important as it is the cash flow used up or generated from operating activities. The techniques of speeding up cash flows are usually applied in the area of cash flow from operations.
The earning potential of a company is quite important but the ability to generate cash flows in a timely fashion is more important than the earning factor. The users of financial statements now emphasise more on cash flows and the timing of cash flows than the earnings of a company as cash flows reflect a more practical position of a company for a specific period of time. The future operations of a company are dependent not on its ability to generate profits but the translation of these profits into cash. As cash is the most vital asset of any organisation it is quite important for the company to manage its cash flows and speed up the cash flows to operate more efficiently in the future.
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