Chapter 15 of Financial Intelligence discusses that cash flow is one of the most versatile measures of business performance. Understanding cash allows seeing how well a company is doing at turning profits into cash, spotting early signs of trouble, and knowing how to manage cash flow to keep it stable. It is cash, not profit, that keeps a company alive, and cash flow is the most critical indicator of its financial health, allowing it to cover all expenses (Tay, 2019).
Chapter 16 reveals that profits often do not match cash in, as the money may come from loans or investors and will not appear on the income statement. Another kind of earnings-cash mismatch is when the company’s bank balance grows monthly, although the company is losing money.
Chapter 17 discusses how cash flow can be challenging to understand for several reasons, such as operator category labels, positives, and negatives do not always match, and challenges in seeing the relationship between a cash flow statement and other financial statements. The chapter covers the different types of cash flow, their sources, and uses and provides tools for understanding cash flow statements.
Chapter 18 deals with the relationship of cash with other financial elements and statements. It reveals how accountants use an income statement and two balance sheets to calculate cash flows. For example, the reconciliation of profits with cash changes in receivables, and depreciation. Examples of companies are also provided to understand cash flows better.
Chapter 19 demonstrates that knowing the financial situation helps understand what is happening now, where the business is headed, and what top management’s likely priorities are. Managers should focus on both profit and cash. The impact is usually limited to operating cash flow, one of the most critical metrics in accounts receivable, inventory, expenses, and giving credit. The general point is that cash flow is a key indicator of a company’s financial health, profitability, and shareholders’ equity.
To conclude, part four toolbox states that a hot new metric on Wall Street is free cash flow. The section indicates ways to calculate free cash flow, the most common approach is simple subtraction: Free cash flow operating cash flow less net capital expenditures. Healthy free cash flow gives the company a good opportunity. To do this, companies with weak free cash flow must attract external financing.
Reference
Tay, K. (2019). Financial Intelligence: The DNA of Business and Investments. Partridge Publishing.