It is the responsibility of organizations to take care of all business aspects and ensure that all is well always. As a result, any corporation works to ensure that besides advancing its production, it has enough cash to meet any contingencies that may arise. Therefore, directors are always highly concerned about the financial status of their firm. For that matter, cash flow is closely monitored so that any negative change is noticed early and actions are taken. It is important to note that cash flow has various advantages to corporations.
To begin with, cash is the driving factor in any institution. Day-to-day expenses need to be paid, no matter what the liquidity state may be. As a result, corporations need to have liquid cash to avoid delaying operations due to a lack of certain inputs (O’Berry, 2010). In this regard, any corporation that does not take care of its cash flow might end up in a precarious situation or even wind up due to the inability to meet daily expenses. On the same note, there are times when a business needs more money to settle various expenses. However, at other times the business may find that requirement for liquid cash is minimal, due to unfavorable business conditions. Unfortunately, business cycles are not very predictable, though many people may believe to have perfect information regarding the same (Hirschey, 2008). Therefore, firms will be on the safe side if they ensure the availability of cash even when it is thought that money might not be required. In this way, the firm will be able to handle the situation in case an impromptu need for money arises.
Furthermore, in the world of business, there are times of boom and times of recession. During booms, businesses enjoy as sales increase and income streams in. However, during recessions businesses suffer because sales decline and at times it becomes difficult to even pay for recurring expenses. In times like this, corporations will need to use their savings to remain in operation. Therefore, the better the cash flow of a firm the higher the chances that the firm will sail through the tough periods. Moreover, expansion is among any corporation’s main aims. Sadly, expansion programs require a lot of cash while returns from the same take time to be realized. However, this is a risk that any firm must take at a given point in time (O’Berry, 2010). Though firms will see their liquid cash decline during expansion, effective preparation to have sound cash flow will be vital to pushing any firm through this period successfully.
On the other hand, firms may always not have the cash to fund all their activities and plans. As a result, firms result in borrowing from banks to fund their plans. However, banks will not issue loans without the assurance that the firms will be able to pay, both the principal loan and interest. Among the issues that banks consider in determining whether a corporation qualifies for a loan is the cash flow of the corporation. As a result, corporations with good cash flows are deemed able to pay for their loans without much strain (Marney & Tarbert, 2011). Consequently, cash flow is a paramount factor in determining whether a corporation can secure a loan from a financial institution or not.
Similarly, when a business opportunity comes along, it is the most prepared firm that can take advantage and benefit from it. Regrettably, the business opportunities cannot be focused with precision, given the unstable economic environment in which businesses operate. Nevertheless, the opportunities can make a great difference in a firm’s existence. Therefore, firms should be well prepared by maintaining sufficient cash flow to take advantage of good opportunities whenever they come along (Megginson & smart, 2008).
Additionally, cash flow is paramount in enhancing the credibility of a corporation not only among its shareholders but also among other stakeholders. Therefore, a firm with well-managed cash flow stands a high chance of getting new investors.
Similarly, a firm that accurately predicts its cash flow will be able to plan well for its activities. As a result, negative disturbances on the budget are minimized, further improving a firm’s credibility. On the same note, increasing shareholders’ value is the main aim of any corporation. As a result, firms endeavor to increase dividend payments each year. Higher cash flow allows a firm to have extra cash after settling all expenses (Marney & Tarbert, 2011). The extra cash can be used to increase production through the acquisition of advanced technology, as well as increasing dividends paid to shareholders.
More importantly, cash flow enables a corporation to avoid paying higher interest for short-term loans. A corporation that controls its cash flow efficiently will not lack money to settle its bills. Consequently, the corporation will not be compelled to go for short-term loans when it runs short of liquidity and options are limited. On the contrary, the firm will have enough time to consider all options of credit.
The advantages of cash flow to a corporation are vital and cannot be overlooked. Consequently, any firm should ensure that cash flow is well managed for guaranteed continuity. It should be noted that cash flow is used in other instances to gauge the management of a corporation. Similarly, new shareholders and other stakeholders use cash flow for their private decisions. As a result, a lot of care should be taken when dealing with the cash flow issue.
References
Hirschey, M. (2008). Managerial Economics. Stanford: Cengage Learning.
Marney, J., & Tarbert, H. (2011). Corporate Finance for Business. New York: Oxford University Press.
Megginson, W. L., & Smart, S. B. (2008). Introduction to Corporate Finance. Stanford: Cengage Learning.
O’Berry, D. (2010). Small Business Cash Flow: Strategies for making Your Business a Financial Success. Hoboken: John Wiley & Sons.