2Discussions, 2 Journal Articles Need

Discussion 2

· Himank Sharma

Part-1

Cash flow is one of the major indicators of financial health. It is defined as the overall change in the firm’s cash position in a particular period.

Having cash on hand ensures a much more stable position with increased buying power. It also helps maintain a buffer against loan defaults and/or foreclosures.

A healthy cash flow allows a firm to invest in growth. One can very well borrow money to invest in buildings, machinery, R&D, technology, training and inventory. Firms can also utilize cash as dividends dispersed to stakeholders or owners. A strong cash flow makes lenders much more accessible to a firm if it decides to take a debt sometime in the near future.

The Profit & Loss Standard (P&L) report truly vital to a firm’s needs on its own, although it does not provide a complete picture of its business. A statement of cash flows depicts where the money flowed in from and where it outflowed to on a daily basis, whereas the profit and loss statement simply shows what a company earned and spent. For example, a profit and loss statement doesn’t show items like credit card payments, owner’s draw etc. And although these are important from a business’s standpoint they aren’t termed as expenses under the accounting category. (Silven-Hoell, 2019)

Some of the ways in which companies manage cash flows are:

i) Use technology to your advantage: Using the cloud on sites like Dropbox so that they are easily accessible from anywhere

ii) Determine the break-even point: Estimating this metric doesn’t affect the current cash flow but the projection of the future one

iii) Maintain reserves: Companies tend to keep a healthy 3-4 month buffer for anomalies and bad projections (Shieldsmith, 2019)

iv) Sales boost: Many firms offer referral programs or contests to rapidly increase sales

Part-2

Analyzing financial statements help figure out the financial health of a firm. There are numerous reasons why this analysis is crucial for understanding the complete financial performance of a company:

i) Firm Liability review: Understanding the financial liabilities is important before a business is looking towards expansion via taking a loan. The financial statement analysis showcases what existing liabilities a firm might have, which might include credit lines, business loans etc. (Leonard, 2019)

ii) Inventory and Asset check: A vital part of the financial statement is a balance sheet. Firms can better forecast for the next few sales months by accurately measuring their current inventory stock. Extra inventory on hand keeps the money locked in, and not having enough may result in customer and market loss.

References

Silven-Hoell Kirsten (2019). Differences Between a Cash Flow Statement and Profit and Loss. Retrieved from https://bizfluent.com/info-8785546-differences-flow-statement-profit-loss.html

Shieldsmith, John (2019). 10 tips for using cash flow management to grow your business. Retrieved from https://quickbooks.intuit.com/r/financial-management/10-tips-managing-cash-flow/

Leonard, Kimberlee (2019). Advantages of a Financial Statement Analysis. Retrieved from https://smallbusiness.chron.com/advantages-financial-statement-analysis-4124.html