Analysis Of Accounting On Cash Flow

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MANAGING CASH FLOW “Follow the money”—William Goldman, All the President 's Men Imagine you were John Olson. You are an energy analyst for Merrill Lynch. Your boss, Donald Sanders, shows you a hand-written note from one of Merrill’s largest customers. It reads in part, ' 'Don -- John Olson has been wrong about … (our company) … for over 10 years and is still wrong … Ken. ' ' Merrill subsequently fired Olson because he refused to endorse the customer’s exaggerated profit claims. The Ken, of course, is Ken Lay of Enron fame; the analyst was John Olson, by his own description an old-fashioned analyst who refused merely to promote stocks, relying instead on fundamental analysis to assess the companies he examined. Ironically, he was the only…show more content…
Where would you be if you had wholeheartedly endorsed Enron like Henry Blodgett of Merrill Lynch and Mary Meeker of Morgan Stanley did? This is why we will focus our discussion of accounting on cash flow analysis as the key to understanding solvency, both your customers and your own and not a broader overview of the Accounting process. I assume all students studied Accounting during their academic career. For those needing a refresher in accounting basics, please visit Accountingverse for detailed information. Why cash Flow? We like cash flow because it permits us to “follow the money” rather than the accrual-based numbers favored by Wall Street. Cash Flow Analysis provides a good way for investors to evaluate a company 's financial well-being and operational strength. Cash Flow is composed of revenue or expense streams that transfer between cash accounts over a specified period. We calculate the "statement of cash flows" showing the amount of cash generated and used by a company during the period by adding back noncash charges (such as depreciation) to net income after taxes. Changes in cash are derived from one of three activities - Financing, Operations or…show more content…
Let’s say you own a landscaping business billing about $600,000 a year, one third from shopping centers, office complexes, and other commercial clients, and the rest from homeowners. “What if” scenarios, envisioning a weakening in your commercial business, should focus on ways to reduce cash flow out and increase cash flow in. Landscaping is labor-intensive, so your first response would almost certainly involve lay-offs or reductions in hours worked. Another strategy would be to shift full-time employees to contract work, transferring your labor costs from fixed to variable expenses. You would save money on payroll taxes and benefits, provide yourself flexibility in hiring and your ability to respond to changing market conditions, conserving cash flow. Shifting equipment expenditures from purchase to lease can also deliver cash savings. To increase cash flow, sell subscription services with automated monthly credit card billing and offer discounts for annual plans to generate cash in
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