Question

Explain how "cash flows" and "free cash flows" influence the "value" and "valuation" of an organization. Be specific. Be sure to discuss each section of the statement of cash flows.

Answer 1

Cash flows- In easy language cash flows are the incomes and expenses of an company during an long period of time. Unlike that of balance sheet, the cash flows occur on day to day or even hourly basis. You can imagine cash flow as an ticking clock that works all way round. Value of the company is the frequency of the cash flows(Income or Expenses) during an particular period of time. While valuation of the company is the net effect of the flow of cash; the total profit or loss made during the whole cash flow transaction.

Free Cash flows- Free cash flows the amount of money that is left with the company after its operational expenses. Value of the company remains constant is the the assets, liquidity etc are unaltered by the operational expenses. Other while, the valuation of the company takes an hit. Cash flow alters the balance sheet and hence the value of the company. Its not hard to notice.