We see that while Aldine's reported net income for 20X2 was $201,000, its cash flow from operating activities was $219,000. Interestingly, the company spent $169,000 - slightly more than 75 percent of its entire operating cash flow - on new fixed assets and long term investments. (Only the additions to fixed assets, however, would seem to be a recurring annual expenditure.) This left only $50,000 of operating cash flow to cover dividend payments of $143,000. Increased borrowings, mostly short term, provided the additional financing to cover dividend payments and provide for a small increase in cash and cash equivalents. When we consider that about half of Aldine's operating cash flow goes to replace depreciating assets, the firm's ability to maintain its current dividend seems to depend on its ability to continue to borrow funds. We may, therefore, be witnessing a signal that the firm will be encountering difficulty in maintaining its current dividend into the future.
From the reconciliation (net income to net cash provided by operating activities) section in Frame A of Table 7.5, we see that a decrease in receivables helped increase cash provided by operating activities, while an increase in inventories and a large decrease in taxes payable helped use up cash from operations. You may have noticed by now that the cash flow statement gives you much of the same information as gathered from an analysis of the sources and uses of funds statement. However, with the direct method of cash-flow presentation, you do get some added details not necessarily derivable from an analysis of simple balance sheet changes.
Implications of Cash Flow Statement Analysis. A major benefit of the statement of cash flows (especially under the direct method) is that the user gets a reasonably detailed picture of a company's operating, investing, and financing transactions involving cash. This threepart breakdown of cash flow aids the user in assessing the company's current and potential future strengths and weaknesses. Strong internal generation of operating cash, over time, would be considered a positive sign. Poor operating cash flow should prompt the analyst to check for unhealthy growth in receivables and/or inventor. Even strong operating cash flow, however, is not enough to ensure success. Statement users need to see the extent to which operating cash is funding needed investments, debt reductions, and dividends. Too much reliance on external financing sources to meet recurring needs may be a danger signal. In short, the cash flow statement is a rich source of information. The difficulty with this statement (as with the other financial statements) is that it must be used in conjunction with other statements and disclosures in order to attain any real depth of understanding.
Cash-flow forecasting can take on critical importance for a firm. Many dot-com start-ur found out to their dismay that their business venture was over when their cash was une: pectedly used up. Even for firms with lots of cash coming in, a missed cash-flow forecast may mean that money sits idle not earning a return.
At the core of any good cash-flow forecasting system, you find the cash budget. A ease budget is arrived at through a projection of future cash receipts and cash disbursements of the firm over various intervals of time. It reveals the timing and amount of expected cash inflo - and outflows over the period studied. With this information, the financial manager is better able to determine the future cash needs of the firm, plan for the financing of these needs, and exercise control over the cash and liquidity of the firm.
Though cash budgets may be prepared for almost any interval of time, monthly projections for a year are most common. This enables analysis of seasonal variations in cash flows. When cash flows are volatile, however, weekly projections may be necessary.