If achieving profit is a company’s goal then having healthy cash flow is most essential to its existence, development and success. This is because cash offers strength, vitality and flexibility to make investment decisions as well as the fuel to run its growth engine.
Often investors flock to companies that earn profits. But even a profit-making company can have a dearth of cash flow and face bankruptcy while meeting its obligations. Specifically, a company’s resiliency can be fairly judged when its efficacy in generating cash flows is assessed. This is because cash not only shields a company from market mayhem but also indicates that profits are being channelized in the right direction. Cash is indeed the lifeblood of any business and indicates a company’s true financial health.
To find this efficiency, one needs to consider a company’s net cash flow figure. While in any business cash moves in and out, it is net cash flow that explains how much money a company is actually generating.
If a company is experiencing a positive cash flow then it denotes an increase in its liquid assets, which gives it the means to meet debt obligations, shell out for expenses, reinvest in business, endure downturns and finally return wealth to shareholders. On the other hand, a negative cash flow indicates a decline in the company’s liquidity, which in turn lowers its flexibility to support these moves.
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