Net Cash/Income
How does net cash flow differ from net income and why is that difference relevant to financial decision making?
Net cash flow takes in consideration the changes in short-term assets of an organization. Whenever a cash receipt is made then net cash flow is raised or when a bill or expense is paid then the net cash flow decreases. It is basically a measure of how much cash, or cash equivalents, that the organization has at any given time. Net cash flow can also be forecasted so that the organization can have an idea of how much cash it will hold, or need to hold, in the future.
Net cash flow, although it is indirectly related, is not necessarily directly related to any measure of profitability. For example, if a company receives a check for a hundred thousand dollars then it would increase net cash flow; even if the receipt was for a project in which they were losing money on. Therefore you can have a positive net cash flow but still have a negative net income. However, cash flow is an important consideration because it often represents a company's ability to pay their short-term liabilities.
By contrast, net income is a direct measure of profitability. This approach will compile the company's total revenues and total expenses for any given period and determine how much of the company's financial activities created profit for stakeholders. The ultimate goal of a company is to maximize profit, not cash flow, in order provide the investors a return.
Cash flow is also an extremely important consideration though. If a company does not have enough cash to pay its bills then it could get itself into a lot of trouble; possibly insolvency. A company can have a large net income, but depending on how the revenues are collected, they could have a negative cash flow at the same time. Many companies have gone bankrupt, not because they are not making a profit, but because they didn't properly manage their cash flow to ensure they had enough cash reserves to pay their bills.
Each section of the cash flow statement tells a different part of the firm's story. For example, it may be understood by management that significant amounts of their profits went into new buildings and equipment. What the cash flow statement does is isolates that information. Management and shareholders alike can extrapolate that data from the balance sheet, noting changes in fixed assets, but the presentation of the cash flow statement
The IRR is also known as yield method, and IRR of a project is the rate of discount at which the present value of cash flow is equal to the present value of cash inflow. While IRR base the value on rate of return, the ARR ignores the time value of money and it is not accounting based of return. Under ARR, depreciation is calculated in different methods such as
A second challenge organizations face with cash flow management is being realistic with the amount of time it will take for them to receive revenues. This negatively affects cash flow projections that Sprague illustrates as being very important to a company's success. Companies are become slower and slower to pay their vendors, with 45 to 60 days becoming more the norm than the traditional 30 days, according to Feldman,
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