Cash Flows vs Liquidity
Cash flows generally refer to the movement of money into or out of a business or financial asset. They can be categorized into operating, investing, financing activities, and are crucial for assessing a company’s financial health and liquidity.
Large corporations and financial institutions calculate their liquidity positions daily if not multiple times a day. They regularly apply stress testing to determine how vulnerable they may be to capital market movements, geopolitical events, supply chain disruptions, loss of key clients, fluctuations in interest rates or foreign currencies.
The liquidity position of a company is NOT accurately represented by an income statement:
The income statement focuses on revenues and expenses incurred during a specific period, regardless of when the cash is received or paid out.
The income statement deducts non-cash items like depreciation and amortization.
It also doesn’t account for changes in working capital or non-operating activities that affect cash positions such as loan principal repayments, equipment purchases or capital improvement costs.
Focusing only on the income statement without reviewing the company’s balance sheet and cashflow statement for that same period will only give you partial information and give you a false sense of security. Although it may appear that you are making money, you may be facing a cash crunch which would hamper your ability to pay your liabilities and leave you unable to buy new inventory, complete necessary capital improvements to stay competitive or continue production.
Small and medium-sized businesses are especially at risk, and this is where NH Business Consulting can be the most helpful. Let us show you how to manage your liquidity position through cash flow forecasts and identify potential shortfalls that can be detrimental to the health of your company. Contact us today as info@nhbusinessconsulting.com.