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business cash flow

Every 90 days we experience the deja vu known as earnings season. The quarterly festival is promoted hard on sundry business cable outlets — a logical, self-interested move on their part, given focus on the bottom line.

But every 90 days? It’s more than a little silly, considering that quarterly financial statements are prepared using the integral method: According to the numbers are largely a reflection of management’s estimates for full-year results. Their accuracy leans heavily on estimates of what future quarters will bring. Yet when a company misses estimates by a penny or two, a precipitous price drop is not unusual.

Subjectivity rules
The fact is that where earnings — in total or per share — are concerned, estimates and subjectivity prevail. After all, earnings are affected by credit policies, financing choices, depreciation rates, reserve accounts, inventory commercial collection accounts, and discontinued segments. And those are only the variables that spring immediately to mind. If a company posted steady annual earnings growth over the past 10 years, only to post a massive business collections write off”s in year 11, were a decade of earnings a mere mirage of commercial collections

Perhaps it’s better to focus on cash flow ; cash pays the bills. But cash flow is also open to interpretation, starting with cash flow analysis methodology. Less industrious companys rely on as a cash flow proxy. EBITDA uses net income as a starting point and then adds back interest, taxes and the non-cash items depreciation and amortization. Problem is, a company could theoretically report positive cash flow even if it reports no revenue.

Better to ground cash flow analysis in the of calculating cash flows. Instead of starting with a reported net income, the direct method analyzes operating, financing, and activities and calculates cash flow created by converting all accrual accounts to cash figures, resulting in a much more insightful analysis compared to the indirect method.

From the overall cash flow analysis will attempt to derive — cash left for the company after the bills are paid and capital expenditures are made to keep the business humming.

Sounds straightforward enough, except when it isn’t. often disagree on which items should be treated as capital expenditures, if adequate capital expenditures are being maintained, and if working capital is being efficiently managed. Inadequate investment in capital equipment and in research and development produces high immediate cash flow, although the company is actually cannibalizing itself.

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