© 2000 John Petroff

J- Analysis of cash flows

So far the analysis of liquidity has focused on stocks or balances of funds. It is based on the balance sheet, and is, except in the analysis of turnover, essentially static. There is a dynamic approach that looks at flows rather than stocks. That is the analysis of cash flows. There are different concepts of cash flows and each has a particular purpose (see Chapter 2 Section B, for instance). It is also necessary to make predictions about these cash flows in the future rather than stop at the analysis of past cash flows.

Indeed, to be confident that a loan will be repaid or that the firm will not become insolvent, the firm must be able to generate cash continuously. It is not profit, but cash flow that is important. It is not the current ability to make payments that is important, but the cash flow for the coming year(s).

See review questions Q-8J.1 and Q-8J.2.

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