Cash flow is how a business will receive and spend money at any particular time. In this essence cash flow is a determinant to various important decisions in the organization that have to be considered. They include investing, lending, basic business operations and other supplements.
One of the areas where cash flow is important is in basic operations of the business activity. Cash is received or used as a result of the business activities involved in a company. It includes cash gained as compared to the capital in the business. For an organization, its solvency has to be positive. In this case solvency is the state of not being in debt such that the company can sustain itself as noted by Bodie, Kane and Marcus (2004). In operations, we try to determine the things that the business needs to operate on. In my Example I will use the Sarova hotels where we have a worldwide customer base. In this case we have to maintain a constant supply of foodstuff with or without customers. By this, cash flow comes in the sustenance of the hotel to continue being in operation at any one moment in time including when we have an in surge of customers.
Cash flow is also important when we are making decisions on investments. Investments include changes in assets of the organization according to Epstein and Eva (2007). Changes may be in the form acquiring new assets or the sale of old ones. For example, when the Sarova group of hotels has run short of customers, it can invest in various fields such as accrual of luxurious facilities to entice the customers or get involved in more advertising locally or overseas. Companies with enough cash at hand are able to invest it back into the business to generate even more cash and make more profit.
Another important decision is in financing activities which basically entail reports on the issuance and probable repurchase of the company’s bonds and even stock. It can also encompass payment of dividends accrued on shares and stocks. Sarova hotel being a vast company may want to acquire some of its previously sold out shares or be involved with some charity details. This cannot happen if the company is almost at a dead end. Otherwise it has to be at a higher equity. For financing of any mode to take place the company must ensure that a high cash flow is maintained whether through soliciting for more cash from creditors or involving more credit in the business outsource as noted by Plewa and Friedlob (1995).
There are various activities that also do require more knowledge on cash flow. We will refer to them as supplements. According to Epstein and Eva (2007) these may include taxes, interests paid and other exchanges that do not involve cash. In my case, Sarova may want to organize an office end of the year party, pay off loans and other activities which are not necessarily in the day to day running of the business. In a way cash flow can be used to determine how much a company is worth. This is an essential decision to investors who may want to buy a company or potential sale of a company. It’s also useful when it is required to borrow loans from financial lending institutions.
References
- Bodie, Z., Alex, K. and Marcus, J. (2004). Essentials of investments, 5th ed. McGraw- Hill Irwin.
- Epstein, B. and Eva, K. J. (2007). Interpretation and application of international financial reporting standards. John Wiley & Sons.
- Franklin, J., Plewa, G & F, Thomas (1995). Understanding cash flow. John Wiley & Sons.