Cash Flow Cycle: Generating Cash for Profitability & Liquidity - Essay Sample

Introduction

A cash flow cycle describes the movement of cash in an organization. It shows how cash from investing, operating, and financing activities move from through the business, and production takes place. Typical cash flow indicates cash payout and cash receipt. Firms rely on three activities to generate cash: investing, financing, and operating (Shapiro & Hanouna, 2019). An organization cannot work effectively without money. However, profitability is not always equal to high liquidity as some firms report high profits and are not liquid. The primary cash flow cycle describes how cash moves from operating activities in term and cash and credit sales to finance the investing activities of a firm. Similarly, credit purchases allow firms to get some money to finance its investing and financing activities.

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The financing activities entail obtaining funds to finance the purchase of capital equipment and to start up a business. The common forms of finances are owners' equity and debt. Therefore, a firm obtains cash from debtors or investors who give money to the firm in exchange for an equity stake. The cash then moves to the firm's investing activities as the business uses the cash to purchase long-term assets. The firm uses the cash from financing activities to buy machinery. In the initial stages of a business, the firm has a high initial capital outlay. However, the money reduces as some go to purchasing of machinery and inventory.

The operating activities of a firm entail the regular activities of purchase and sale of commodities. They are the activities that a firm engages in to generate sales. The cash flow from operating activities results from the purchase of items on cash or credit and purchase of inventory from suppliers. Even though firms can make cash sales, some offer credit to their customers. The credit sales result in cash flow known as accounts receivable. The purchase of inventories from suppliers could also be in the form of cash or credit (accounts payable).

Businesses attempt to shorten the cash flow cycle by accelerating the collection of receivables, and delaying payment of payables. Firms offer discounts for credit sales paid within a specified period by trying to expedite the collection of receivables. Additionally, the firms delay paying of payables to increase its liquidity.

How Financial Management Is Related to Accounting

Financial management is an integral part of every organization. It is the organization, planning, and controlling the firm's financial resources to achieve financial goals and objectives. Financial management entails assessing the current and future financial needs of an organization and developing long term financial strategies to achieve desired goals and objectives. Besides, it involves evaluating future financial investment and aligning the present financial actions with future financial needs.

Financial management is related to accounting in that capital budgeting and financial decisions require the output of accounting. Financial statements made from accounting are critical in assessing a firm's financial needs, a key function of financial management. Additionally, financial managers rely on financial reports to project about the future financial needs of a firm and the possible strategies required to attain the intended goals and objectives. Therefore, financial accounting plays a crucial role in furnishing financial managers with relevant data needed to execute the critical mandate of financial management (Narayanaswamy, 2017). The key financial statements, balance sheet, income statement, and cash flow statement summarize the firm's relevant economic activities.

Aside from financial accounting, cost accounting also provides financial managers with information to help them evaluate decisions. Cost accounting information determines the proper allocation of resources, thus help financial managers evaluate decisions such as starting a new product line or purchasing a new asset. Besides, cost accounting helps in a cost-benefit analysis to furnish financial managers with the needed information in making financial decisions.

Difference Between Sole Proprietorships, General Partnerships, Limited Liability Companies, S Corporations, and C Corporations

The various types of firms differ in terms of size, existence, taxation, ownership, and management and liability. A sole proprietorship has only one individual who doubles as the owner and manager of the business. General partnership firms have more than one person, while S corporations do not limit on the number of individuals required to start the corporation. On the other hand, limited liability companies require one or more persons depending on the state, whereas C corporations require a maximum of 100 individuals.

In terms of existence, both S and C corporations have perpetual existence, whereas sole proprietorships exist until the owner dies or dissolves the business. On the other hand, general partnerships exist until one partner dies or withdraws their membership or when the partners agree to dissolve it. The existence of limited liability companies varies depending on the state. However, their general existence is to perpetuity.

In limited liability companies, S corporations, and C corporations, members have unlimited liability. Unlimited liabilities imply that members are not liable for the obligations of the firm. However, sole proprietorships have limited liability while the general partners in a partnership have unlimited liability.

In a sole proprietorship firm, the sole proprietor doubles as the owner and manager of the firm. However, they differ from S corporations and C corporations, which have a team of managers, shareholders, and board of directors that oversee the firms. In a general partnership, the partners have equal rights to management and ownership of the firm. However, the ownership of an LLC depends on the agreement.

Various types of firms also differ in terms of taxation where sole proprietorships, general partnerships, limited liability companies, and S corporations have their income taxed once. However, this is not the case for C corporations as they are subject to double taxation.

Suppose three optometrists wished to form a business that was expected to last until the oldest one was about to retire. The three had known each other since college and were close friends who trusted each other. What type of firm might be appropriate? Why?

The appropriate type of business for the three optometrists is a general partnership because the description of their requirements fit those of a general partnership. A general partnership exists until when one partner dies or withdraws. Therefore, it would be appropriate for them to start a general partnership whose existence will be until the oldest optometrist retires. At that point, they can dissolve the partnership. Besides, a general partnership requires more than one person to start operations. Additionally, the three individuals are close friends; hence it would be easy for them to own and manage the business. A general partnership also offers unlimited liability to the partners; thus, the partners will not have to sell their personal assets to settle the business's debts.

References

Narayanaswamy, R. (2017). Financial accounting: a managerial perspective. PHI Learning Pvt. Ltd. https://books.google.co.ke/books/about/FINANCIAL_ACCOUNTING.html?id=0yYrDwAAQBAJ&redir_esc=y

Shapiro, A. C., & Hanouna, P. (2019). Multinational financial management. Wiley. https://www.wiley.com/en-us/Multinational+Financial+Management%2C+11th+Edition-p-9781119559900