Question

Why do we focus on cash flows rather than accounting profits in making our capital-budgeting decisions? Why are we only interested in incremental cash flows rather than total cash flows? As a financial manager, explain why these concepts are important to business leaders in Saudi Arabia. Search the SEU library or the internet for an academic or industry-related article. Select an article that relates to these values and doing business in Saudi Arabia.

For your discussion post, your first step is to summarize the article in two paragraphs describing what you think are the most important points made by the authors (remember to cite the information, as appropriate). For the second step, include the reference listing with a hyperlink to the article.

Answer 1

Cash flow and profits are both crucial aspects of a business. For a business to be successful in the long term, it needs to generate profits while also operating with positive cash flow. Cash flow is the inflow and outflow of money from a business. It is necessary for daily operations, taxes, purchasing inventory, and paying employees and operating costs. Positive cash flow indicates that a company's liquid assets are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses and provide a buffer against future financial challenges. Negative cash flow indicates that a company's liquid assets are decreasing. Profit is the surplus after all expenses are deducted from revenue. Profit is the overall picture of a business, and the basis on which tax is calculated.
There are three major types of profit that analysts analyze: gross profit, operating profit and net profit. Each type of profit gives the analyst more information about the company's performance, especially when compared against other time periods and industry competitors. All three levels of profitability can be found on the income statement. When determining which one is more important, it depends on the business and the circumstances.

An incremental cash flow is the additional operating cash flow that an organization receives from taking on a new project. A positive incremental cash flow means that the company's cash flow will increase with the acceptance of the project. A positive incremental cash flow is a good indication that an organization should spend some time and money investing in the project. There are several components that must be identified when looking at incremental cash flows: the initial outlay, cash flows from taking on the project, terminal cost or value, and the scale and timing of the project.
Incremental cash flow is the net cash flow from all cash inflows and outflows over a specific time period and between two or more business choices. For example, a business may project the net effects on the cash flow statement by investing in a new business line or by expanding an existing business line. The project that has the higher incremental cash flow may be the better choice for the business. Incremental cash flow projections are required for calculating a project's net present value, internal rate of return and payback period. Projecting incremental cash flows may also be helpful in projecting certain balance sheet line items.

Importance of cashflow and incremental cashflow in Saudi Arabian business -

Cash is King when you are running your own business and potential for short and long-term success. This is why Riyad Bank is offering to help you manage your cash liquidity effectively.

The fact is that the cheapest source of money you can find is already in your business. In good times and bad, it is always a sound practice to manage for cash or what accountants refer to as “liquidity”.

Few businesses can operate with cash only, which is without any credit. However, in the granting of credit, there is a fine balance between providing an incentive to close a sale and losing control of your assets

The UAE construction market is becoming increasingly competitive as cash flow issues remain a concern, a top contractor has revealed

According to The Colliers Abu Dhabi and Dubai Construction Cost Benchmarking report in February, the single biggest issue facing UAE contractors and sub-contractors was cash flow due to sustained delays in payments, which they said negatively impacts the quality of projects, budgets, and time.

UAE companies are struggling to make payments on time as liquidity tightens in the region, and some have even been forced to flee the country to escape debts they cannot repay

In the metals and construction sector, notifications of overdue payments soared by 26 percent between the fourth quarter of 2015 and first quarter of 2016, according to research from credit management company Coface.

Average payment terms in the information technology and electronics sector increased by more than three times from 30 days to 105 days (a 250 percent rise), while the petrochemicals sector saw average payment terms more than double from 30 days to 78 days, a 160 percent rise

Many companies are suffering squeezes on profit margins, affecting their cashflow and forcing them to delay payments

It calculated a total of 239 runaway, or ‘skipping’, companies – those that fled the UAE altogether to avoid paying debts – between July 2015 and March 2016. More than half (54 percent) of those were in the general trading business, it said, while the food sector saw 32 runaways, the IT and electronics sector saw 29 and the petrochemicals sector saw 18.

Bouncing cheques and bankruptcy are criminal offences in the UAE, prompting companies that run into financial difficulties to take what they perceive as the safest option: leaving the country.  

Sources :
http://www.arabianbusiness.com/cash-flow-respite-for-uae-construction-companies-676232.html

https://www.riyadbank.com/en/business-banking/resources/cash-management

http://www.arabianindustry.com/construction/news/2017/may/31/uae-construction-continues-to-face-cash-flow-issues-5742139/

http://www.arabianbusiness.com/late-payments-runaway-firms-on-increase-as-uae-businesses-cashflow-squeezed-640557.html