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In: Accounting

Most managers stress the importance of understanding and predicting cash flows for business decisions

Most managers stress the importance of understanding and predicting cash flows for business decisions

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Expert Solution

Yes, because it provides the scenario of the profitability of business or how liquid the business decision will be?

In order to a business decision be profitable for the company it is critical to predict cash flow and then to deduct the expenses done to earn that cash flow, non cash expenses such as depreciation should be adjusted for tax effects, the end result would provide us with net cash flows, which are then brought down to their present value by using g PV factor at the rate applicable, giving us the present value of cash flows.

The PV if cash flows when compared to initial investment gives us the result that the business decision is good for the company or detrimental.

Positive NPV's increase shareholder'wealth whereas negative NPV decreases shareholder'wealth.

So the prediction of cash flow is a starting point to analyze the profitablity of any business decision, it gives us the result that a particular business decision should be made or not?

ekkarill92 answered 1 year ago
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