Question

In 250 words describe business activities that affect a firm's cash flow. Please leave a question for your peers to respond to.

Answer 1

Cash Flow is usually defined as the difference between the net cash available to the firm at the beggining of the accounting period(opening balance) and at the end of the period(closing balance).If the closing cash balance is higher than that of the beggining of the year,it is usually called Positive Cash Flow and Negative Cash Flow if otherwise.Now,from a practical point of view,there are several factors that might evidently affect the cash flow of the company such as volume of sales revenue,economies of scale,selling an asset,market power(control over market price),increasing the equity level and so forth.This report will briefly explore some of these important factors.

First, with high levels of consumer demand the firm can usually enhance its sales revenue by increasing sales.In a competitive market the firm can do this through establishing market reputation,enhancing product quality,catering to the specific needs and preferences of the consumers,attracting potential customers,finding ways to move ahead of the competition etc.In an imperfect market structure such as monopoly or monopolistic competition, sales revenue depends very much onthe extent of market power that the firm might have.The higher the market power or the ability to manipulate the product price based on individual consumers, the higher control the firm will have on its sales revenue which is indeed an advantage of imperfect competition.Therefore, effective control over salses revenue can ensure higher cash inflow during the accounting period consequently having a positive cash flow at the end of the period.

Secondly,attaining consistent economies of scale in the market is anothereffective way the firm can control its cash flow at the end of the period.Economies of scale essentially refers to attaining higher levels of production(high productivity) with minimum cost possible.In any type of market structure, it is highly essential to reduce cost of production by employing advanced technology or machinery or implement mechanized production procedures which will increase production in a cost effective way.This is lead to a competitive advantage for the firm over its counterparts in the market and can enable cost controlling which would consequently reduce the cash outflow.Hence, it can ensure positive cash flow at the end of accounting period.

Lastly, selling of depreciable assets can also bring additional cash inflow during the accounting period.The firm has to identify which assets it can dispense which has a considerably high depreciation and is no more valuable in the production process.In this case,replacement of the old asset with the new one will eventually will add to the cash outflow but however, keeping a depreciated asset can also lead to higher maintanance and frequent repair cost.Hence,buying and selling of asset can evidently affect the cash flow of the firm and the if handled effectively it can ascertain positive cash flow.

Food for Thought

Do you think the level of Cash Flow is an accurate measure of the economic/financial performance of the firm?Please justify your answer.