Where Is Having High Cash Flow Misleading?
Where Is Having High Cash Flow Misleading?
Investors, analysts, and managers still have to think about cash flow in accordance with prominent financial reports other than the cash flow statement, in order to avoid misinterpreting their financial situation. You could overestimate your company’s future potential by looking at its cash flow statements alone.
Cash Flow Basics
The statement of cash flows shows the net changes for a company’s investing, operating, and financing activities in a given period of time. While each category has an effect on overall cash flow, the operating one is particularly critical as it reveals changes in cash emerging from that company’s main business activities. The statement shows the final cash flow for that period’s end date once negative or positive changes in it have been taken into account.
Bad Debt
To answer the suggestive question in the title, take the example of a firm which anticipates and writes off considerable bad debt accounts while formulating the net income statement. Its cash flow statement, however, does not really account for these financial obligations and shows a higher cash flow than what that organization will ever collect. Essentially, it has millions of outstanding cash it realizes it will not get.
