Cash Flow

Cash Flow

Cash flow reflects at the movement of finances or money out and into a business entity within a stipulated period of time. Cash flow is considered influential in a business since it gives a rough idea on the position and value of an organization at a particular time (Schaeffer, 2013). Cash flow is considered the ‘king’ in an organization since its used in determining the value and the rate of return of an organization, determining the problems in the liquidity of the organization, estimating the profits made by an organization, evaluating the income that is constantly generated by the accrual accounting and in evaluating the risks associated with a particular financial product (McCracken, 2009).

Blood flows through the systems of living things and keeps them alive, in the same concept; cash flow is symbolized as the life blood in making sure that organizations are running as expected. Poor cash flow results to a business failure if corrective measures are not observed (Schaeffer, 2013). Businesses take risks that could result to negative cash flow, the main drivers of risk taking initiative is in building a competitive edge and also in increasing the market share in the target market (Jury, 2012). Without taking business risks, there are high chances that the business entity will never grow, and at the same time will be overtaken by events as the world face constant changes with modernization. Some of the common risks taken by business organizations identify with growth or expansions, taking up new projects and capital budgeting.

Reflecting as a Chief Financial Officer (CFO) of a struggling business organization, records indicate that the organization has positive cash flow at its minimal, it is evident that the organization is struggling with financial resources, and if the trend is not critically considered, there are high chances of a business failure. The top management teams at the organization have noted on the financial trends and have developed a new product expected to hit in the target market within two years. The performance of the new product will shape the destiny of the organization. The main risk at hand is running out of cash in the next six months. The CFO will have to source for alternative funds in keeping the business entity afloat and in convincing the stakeholders to continue supporting the organization.

Acquiring finances for the business is a complex process, and most financiers consider the cash flow of the organization (Schaeffer, 2013). There are diverse alternatives that can be used in financing a business entity. Some of the common alternatives in the market identify with taking a bank loan, the organization can also take loan on the basis of receivable factoring, secure credit through the assets owned by the organization and the organization can also issue equity (Schaeffer, 2013). Each and every mode of financing a business entity has it merits and demerits. It is wise making the right choice to avoid financial pressure and constraints.

In this case, the best mode of financing the business entity is by issuing equity, in preference of financing through debt. Financing through equity is the best choice since it will involve the stakeholders where they will be issued with shares and convertible debts (Bionic Turtle, 2008). This mode will not have interests accrued as compared to the financing through debts that has high interests and risks. Surveys have indicated that deciding the mode of financing a business through loans and through equity financing is a complex decision to make since it involves a number of variables (Stock Market Terms: What is the difference between “common” and “preferred stock”?, 2012).

Equity financing avoids taking debts, since the attained finances through equity has no interest and has no repayment hassles. The main challenge is that the business entity will have to share the profits made with the angel investors or the venture capitalist (Bionic Turtle, 2010). Equity financing which is preferred by the CFO will offer minimized risks comparing to the loans; in the sense that the business will not struggle paying back the money. Considering that the cash flow of this business is at its minimal positive cash flow, there are high chances that the organization will have little capabilities of paying back the debts. Equity will be influential since the business entity will be in the list of investor’s network (Schaeffer, 2013).

In has been noted that investors consider the long term viability of an organization, and that investors do not expect an immediate return on the investments made. Another advantage of engaging investors is that the profits made by the organization will not be channeled to repaying loans; the profits will be shared among investors among other stakeholders. Engaging investors will enable the business to have excessive cash which will foster other establishments or projects that will generate fast cash; and if the business fails at the end of the day, there are no repayments guaranteed to the investors (Schaeffer, 2013). Equity financing is the best option for this organization comparing to other ways of financing a business, which will keep the stakeholders optimistic and happy.

Cash flow in a business entity in most cases is considered seriously since it defines the fate of a business entity in the phase of business transactions. Organizations are encouraged to foster channels of making sure that cash flow is kept as healthy as possible to enhance sustainability (Schaeffer, 2013).

References

Bionic Turtle. (2008, November 04). Security Market Line (SML). Retrieved November 19, 2013, from Youtube.com: http://www.youtube.com/watch?v=tSHs8YwWOHc&feature=related

Bionic Turtle. (2010, July 23). Weighted average cost of capital (WACC). Retrieved November 19, 2013, from Youtube.com: http://www.youtube.com/watch?v=eKFy5HuOoQo

Jury, T. (2012). Cash Flow Analysis and Forecasting: The Definitive Guide to Understanding and Using Published Cash Flow Data. Hoboken, New Jersey: Wiley.

McCracken, M. (2009). Cost of Capital. Retrieved November 19, 2013, from Teachmefinance.com: http://www.teachmefinance.com/costofcapital.html

Schaeffer, H. A. (2013). Essentials of Cash Flow . Hoboken, New Jersey: Wiley.

Stock Market Terms: What is the difference between “common” and “preferred stock”? (2012). Retrieved November 19, 2013, from Videojug.com: http://www.videojug.com/interview/stock-market-terms#what-is-the-difference-between-common-and-preferred-stock

 

 

 

 

 

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