Various analytical techniques exist To assess company’s financial strength, we know that profitability, efficiency, leverage and liquidity are among those. Historically analysts have concentrated on the results deriving from the Profit and Loss and Balance Sheet, nowadays things are different, huge companies like Amazon have proved that ‘Cash is King’ and profitability is eventual. In Netprofitbuilers we share this vision, that is why when we implement Netsuite we advise CFOs to create specific portlets to monitor the 3 elements of the Cash Flow Statement being Cash Flow from Operations, Financing, Investing.
Perhaps the most important cash flow relationship is the one between the cash flow from operations and reported net income (In Netsuite it is possible to create formulas to calculate any ratios within the Cash Flow Statement) the so-called Cash-Flow-to-Net-Income ratio reflects the extent to which accrual entries have ‘contaminated’ the overall financial results, the formula to calculate this ratio is CFFO/NetIncome any CFO knows how to contextualize the result of this ratio and make sure that the correct actions are taken if the values are not in line with the expectations.
It is possible that companies with net-losses produce a healthy cash flow which we all know assures continuity, whereas it is possible to find companies with healthy net income but negative cash flows, normally profit alone does not ‘pay the bills’ it needs to be converted into cash.
If You want to know more about Netsuite One World Financial Platform and how it can streamline your entire worldwide operations contact us.