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Cash Flow Management: Definition

The relevance of the topic regarding cash flow management remains essential in the modern market. Sustainable profit is the main source that contributes to the proper functioning and development of any company as well as a stable financial position. According to researchers, cash flows can be defined as “the amount of cash that a business entity owns and which ensures its efficiency, financial stability, solvency, liquidity, and image” (Soboleva et al., 2018, p. 2035). In other words, it is a set of receipts and payments that are generated by a company’s activities, a dynamic movement of money over time.

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In the field of financial studies, considerable attention is paid to the primary purpose of cash flow management. First of all, cash flow is both an influential factor and a consequence of all economic activities of the enterprise in many aspects. Effectively organized financing of a company is one of the most important symptoms of its economic condition. Moreover, it can also be considered a prerequisite for achieving benefits and high results of business performance in general.

Rational formation of cash flows contributes to the process of the implementation of any new policies in a firm. Any failure to gather revenue and to make necessary payments negatively affects several activities, including purchasing raw materials. Furthermore, the financial situation of an enterprise seriously affects the level of labor productivity. For this reason, researchers note that any activity “requires spending money and should be conducted in such a way as to ensure sufficient financial flows” (Sula, 2015, p. 74). By actively and effectively managing cash flows, it is possible to ensure more rational and economical use of a firm’s financial resources that are generated from internal sources. Therefore, it would be easier to reduce the dependence of the enterprise’s development rate on investments from the outside. Negative cash flows demonstrate unfavorable financial health and repel possible investors, where, on the contrary, satisfactory cash flow rates validate and secure a company’s position in the marketplace. Therefore, by ensuring a stable financial status, more assurance is created for the enterprise’s ability to pay its full expenses.

In addition, the factor of cash flow should be taken into account when assessing financial conditions of a company, since it is an important financial lever that can guarantee the acceleration of the capital turnover of the enterprise. By developing the flow of money through effective management, a company can increase the amount of profit generated over time. Proper synchronization of cash receipts and payments can be achieved during the process of managing, which in the long run, eliminates the factor of bankruptcy and is another determinant considered by analysts. Predicting possible future revenue and payments can be conducted in the form of analytical tables. After analyzing the number of net cash flows, necessary measures should be taken to optimize cash management in a company as in that way a specialist is able to provide a full idea of company’s financial state.

In 2012, Ford Motor Company released a report that contained information about changes in its financial situation. In general, the firm indicates that “execution of One Ford plan has generated significant positive automotive operating-related cash flow in recent years” (Ford Motor Company, 2012, p. 18). In order to be specific, it must be noted that by 2012 the gross cash has raised up to 24.3 billion dollars from 20.5 billion dollars in 2010 (Ford Motor Company, 2012). Moreover, even though their capital expenditures have also grown from 4,092 million dollars in 2010 up to 5,488 million dollars, the amount of short-term debt reduced. These outcomes suggest that while the spending of the company significantly increased during these two years, Ford still managed to generate positive cash flow.

Stable cash flow of the company is a determinant of company’s stability on the marketplace. Cash flow statements are of great importance while assessing a company’s financial status. A new approach to financial plan execution by Ford Motors is a prominent example of a significant improvement of cash flows in the short span of time, which must not be overlooked.

References

Ford Motor Company. 2012 Annual report – Profitable growth for all, Ford Motor Company [PDF document]. Web.

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Soboleva, Y. P., Matveev, V. V., Ilminskaya, S. A., Efimenko, I. S., Rezvyakova, I. V., & Mazur, L. V. (2018). Monitoring of businesses operations with cash flow analysis. International Journal of Civil Engineering and Technology, 9(11), 2034-2044.

Sula, V. (2015). Cash flows management at the enterprise level. Economie şi Sociologie, (1), 74-77.

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