Blog 6: Finance Applications

 Blog 6: Finance Applications

                In week six of Business Perspectives, we focused on financial applications in the context of business decision-making. One of the areas of focus was identifying relevant cash flows, learning how to determine cash flows concerning capital investments, and inflation.  Another area of focus was evaluating operating cash flow. We were able to make financial calculations to understand the project's financial visibility.  Overall, this week laid the foundation for me in terms of finance applications to real-world business scenarios, particularly in relation to investment decisions. 

                The Wall Street Journal published an article that asserts “cash flow is a critical indicator of a company’s current health as well as its future. Free cash flow—the amount left over after commitments to capital expenses, employees and other obligations are met—are often directly tied to a company’s ability to grow, compete and attract new investors” (Improving Cash Flow Process Can Bring Surprising Benefits, 2025, para. 1).  A second article published in the Wall Street Journal mirrors this message, stating, “while there are several strategies organizations can deploy to buffer their business against uncertainty, improving cash flow forecasting can be particularly effective (Why an Emphasis on Cash Flow Forecasting Remains Critical, 2025, para. 1).  When cash flow is improved, it can lead to improved efficiencies and a competitive edge.  The pandemic emphasized the significance of cash flow forecasting.  Many companies had to quickly obtain cash reserves due to an abrupt drop in revenue.  This has put a spotlight on forecasting cash flows (Why an Emphasis on Cash Flow Forecasting Remains Critical, 2025).  “It is important from a governance perspective to have a formalized approach in which cash and liquidity levels are discussed with key stakeholders so decision-makers can analyze and understand the trends and drivers of cash—a critical prerequisite to forecasting and managing cash” (Why an Emphasis on Cash Flow Forecasting Remains Critical, 2025, para. 6).

“Most companies don’t develop a working-capital strategy and unknowingly squander many opportunities to improve their use of working capital” (Improving Cash Flow Process Can Bring Surprising Benefits, 2025, para. 4).  The article referenced an indirect vs direct method to evaluate cash flow forecasting.  The indirect method utilizes the profit and loss statement and the balance sheet.  This method adjusts net income by reviewing working capital to estimate cash flow. This method lacks detail and may not accurately predict future cash flow (Why an Emphasis on Cash Flow Forecasting Remains Critical, 2025). The direct method appears to give a more detailed view of cash flow, looking at ground-up transactions (Why an Emphasis on Cash Flow Forecasting Remains Critical, 2025).

We learned in week 6 about cash flows and how to estimate operational cash flows (OCF).  OCF = EBIT (earnings before income taxes) – Taxes + Depreciation. (The McGraw-Hill Companies, 2008).  We also learned of other methods for calculating operational cash flows that were parallel to the article, including Bottom-Up and Top-Down approaches: Bottom-up approach (OCF – NI + Depreciation), the top-down approach (OCF = Sales – Costs – Taxes), and the tax shied approach (OCF = (sales – Costs)(1-T) + (Depreciation * T)) (The McGraw-Hill Companies, 2008, PP slide 22 section).

In summary, we learned that cash flow refers to the movement of money in and out of a business (Understanding Cash Flow: A Key to Financial Stability, 2024).  We learned that accounting income includes non-cash items like depreciation.  I enjoyed the slides covering depreciation: “Consider depreciation expense.  You never write a check made out to depreciation” (The McGraw-Hill Companies, 2008, PP slide 5 section).  When evaluating a project, the goal is to convert accounting figures into cash flows.  “Much of the work in evaluating a project lies in taking accounting numbers and generating cash flows” (The McGraw-Hill Companies, 2008, PP slide 5 section).  Ultimately, we learned to make a viable financial decision; it is essential to focus on actual cash flow.

 

References

Improving cash flow process can bring surprising benefits. (2025, June 9). Wall Street Journal. Retrieved July 9, 2025, from https://partners.wsj.com/keybank/doing-more-with-more/improving-cash-flow-process-can-bring-surprising-benefits/?gaa_at=eafs&gaa_n=ASWzDAgiLf_BqsLYTp2CvgTTIwypZ9lK7ij-vh3tFQbvu1dSPZeQNSLOlujECTvYKRI%3D&gaa_ts=686e793c&gaa_sig=JQdbzbh-K4P4GBytEzAMwX7ISh4HM8bvk3wA4dHKl81JI2plC5OmituQta2Vr84MID0A0uLbcGJVf1kp18bx3Q%3D%3D

The McGraw-Hill Companies. (2008). Making capital investment decisions [BUS 501, Dr. Tilles, PowerPoint MOD 6]. https://uispringfield.instructure.com/courses/17974/pages/module-6-lecture-materials-npv-capital-investment-decisions?module_item_id=841570

Understanding Cash Flow: A Key to Financial Stability. (2024, April 17). richdelivery. Retrieved July 12, 2025, from https://richdelivery.com/understanding-cash-flow-a-key-to-financial-stability

Why an emphasis on cash flow forecasting remains critical. (2025). CFO Journal. Retrieved July 9, 2025, from https://deloitte.wsj.com/cfo/why-an-emphasis-on-cash-flow-forecasting-remains-critical-01675711952?gaa_at=eafs&gaa_n=ASWzDAi6PGu3A-e_jxjdGe2e0fu0ua21Z5xpOSGcT4rH7VDsR3nCQCnTIZhJtRT4cS0%3D&gaa_ts=686e793c&gaa_sig=dQEnvNQ-VPNLmEbeml7bgkbSX5t7zZiWkhHsgdUMUt5y-V1GbsoowrVXrZyQfkSe84XBFXkEAgx4Ff7zl6we-w%3D%3D