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The key concepts behind decision-making in any organization are accounting profit, operating cashflow, net cash flow and free cashflow. These concepts will help you understand your company’s financial situation and enable you to make better business decisions.
Accounting profit is a measure of a company’s financial performance that is calculated by subtracting expenses from revenues. It is used to determine the company’s profitability and is an important metric for investors and stakeholders.
Operating cash flow, on the other hand, is a measure of the cash that is generated from the company’s operations. The cash flow is calculated by adding the revenues to the operating cash, and subtracting any cash that was used on expenses. Adjusting for variations in working capital can also be done. It is an important metric for managers as it indicates the company’s ability to generate cash from its operations.
Net cash flow is a measure of the company’s overall cash position and is calculated by taking the cash generated from all sources and subtracting all cash outflows. It is an important metric for managers as it indicates the company’s overall cash position and its ability to pay bills and invest in growth.
After all expenses have been paid, the free cash flow represents the total cash the company has left to invest in growth. The cash flow is calculated as the sum of all operating cash, capital expenditures, changes in working capital and any funds from investing or financing activities. It is an important metric for managers as it indicates the company’s ability to invest in growth and pay dividends.
The management team and investors are usually the main stakeholders for cash flow planning, profit estimation, and profits. Financial statements are prepared by the finance department. They also forecast future cash flows and profit. The management team uses this information to make decisions about the company’s operations and growth. This information is used by investors to decide whether or not to invest in the company.
Accounting profit, operating cashflow, net cashflow, and free cashflow can have a significant impact on the decisions made by an organization. A company that has strong cash flow can invest in expansion and growth, while one with low cash flow might need to cut costs. Strong net cash flows may allow a company to make purchases or pay dividends. A company that has weak cash flow might need capital. Strong free cash flow can be used to pay dividends or invest in research and developments. A weaker free cash flow company may have to cut costs.
