Cash flow statement has the advantage of not recording noncash items that do not directly involve transfer of money. Any potential investor may be interested in the cash flow statement because it tells whether an organization is able to generate cash or not. In some instances, companies that have recorded good profits have failed to succeed because they had no ability to generate cash. Cash that is received in an organization is important as it tells whether the organization can sustain its activities. Cash has to be available when needed and used on a daily basis in every business organization.
The cash flow statement is hence important in telling whether the business has enough cash to meet its expenses and other obligations. The debtors have to be paid using cash and not the revenues indicated in the income statement (Dickie, 2006). The cash available is used to pay daily expenses, so the cash flow statement tells whether organization can meet these expenses. In that case, the management need the cash flow statement to tell whether there is enough cash to run the business and at the same time, the investors need the cash flow statement to find out the ability to repay loans and interest. The shareholders also can tell whether their organization is able to pay dividends.
The cash flow statement is crucial in telling whether the business organizations are using their funds well. Some organizations may be generating revenues that are either taken home by the owners or distributed to the investors, so the business is not likely to grow (Kapil, 2011). The cash flow is what tells whether the business is using the generated to invest in activities that bring in more cash to the business, hence facilitating growth.
It is expected that as a business grows, assets increase along with its ability to generate revenues. The cash flow statement shows whether the business has invested in assets that are crucial in enhancing the revenue generating activities. It also shows the cash that is available for the business to invest in important projects that can generate revenues. The other financial statements cannot reveal whether the business has money to invest in projects that can facilitate growth (Dickie, 2006).
The cash flow statement has three parts showing the source of the cash for the business. The major part is the cash from operating activities. The largest part of cash should come from this area because it tells whether the business activities of the organization are bringing in cash to meet costs in the organization. On the other hand, the cash from the financing activities tells whether the business borrows too much from creditors (Kapil, 2011). Depending on this source of cash money has to be repaid after some time. The cash from investment activities also should not be a crucial source of cash for the business. The business should invest in operational activities and generate more cash from those activities.
Ford is a motor company that has had positive profitability. It is important to evaluate the cash flow statement to tell whether the business is doing well in generating cash.
From the operational activities, it can be seen that Ford is doing well. Its cash inflow from the operational activities has increased from $9,045,000,000 in 2012 to $ 10,444,000,000 in the year of 2013. This shows that the ability to generate cash from the major business activities has improved. Therefore, the company can now pay its debts and invest the funds in revenue generating activities.
Looking at the total cash flow investment activities, the value is negative, and this means that the company has invested funds in projects that are to become major sources of revenues in the future. The capital expenditure has increased and the revenue from investing activities has increased showing that the company has invested cash in activities that bring in cash. The cash from investing activities in 2013 was $-45,632,000,000 while that cash from capital expenditure was $-6,597,000,000 (Yahoo Finance, 2013). This to an extent shows that Ford has failed to invest in activities that relate to its business activities. The company invests less in the motor vehicle-making business, resulting in a lack of prioritization because it may fail to perform well in the future.
For the financing activities, the cash has increased from $3,705,000,000 in 2012 to $ 8,133,000,000 in 2013 (Yahoo Finance, 2013). This shows that the company dependence on external financing is increasing which is not a good trend. There is a need to limit borrowing because repayment of the cash is expensive and can lead to bankruptcy of the company if not well managed.
Overall, the financial position of the company as per the cash flow statement improved from $-1,489,000,000 to $-1,191,000,000. However, the company has much to do to ensure that the position is further improved. It is important for the company to have positive cash flows. It will have cash to pay shareholders and meet its daily expenses. As per now, the company heavily depends on borrowing, which should not be a solution. It has to manage cash that it generates from operations and reduce dependence in external financing. The company also needs to prioritize its investment activities to ensure that the cash that goes to capital is higher than the cash that goes to investment activities because this is what determines the growth of the company. As per now, one may conclude that Ford Company management is performing poorly in management of cash.
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