Importance of cash flow in this period of uncertainty

Now a days, with the continued improvement from global pandemic situation and the impact on economy due crises in Ukraine, the global economy is going through an unprecedented challenges among which inflation, disruption in global supply chain finance are coming up. USA since early last year has gradually increased its Fed interest rate manifold. As a result, global demand for US dollars have gained value resulting to inflation globally.

The term cash flow refers to the net amount of cash and cash equivalents being transferred in and out of a company. Cash received represents inflows, while money spent represents outflows.

A company’s ability to create value for shareholders is fundamentally determined by its ability to generate positive cash flows or, more specifically, to maximize long-term free cash flow (FCF). FCF is the cash generated by a company from its normal business operations after subtracting any money spent on capital expenditures.

Cash flow is the amount of cash that comes in and goes out of a company. Businesses take in money from sales as revenues and spend money on expenses. They may also receive income from interest, investments, royalties and licensing agreements and sell products on credit, expecting to actually receive the cash owed at a late date.

Assessing the amounts, timing, and uncertainty of cash flows, along with where they originate and where they go, is one of the most important objectives of financial reporting. It is essential for assessing a company’s liquiditu, flexibility, and overall financial performance.

Positive cash flow indicates that a company’s liquid positions are increasing, enabling it to cover obligations, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges. Companies with strong financial flexibility can take advantage of profitable investments. They also fare better in downturns, by avoiding the costs of financial distress.

Cash flows can be analyzed using the cash flow statement a standard financial statement that reports on a company's sources and usage of cash over a specified time period. Corporate management, analysts, and investors are able to use it to determine how well a company can earn cash to pay its debts and manage its operating expenses. The cash flow statement is one of the most important financial statements issued by a company, along with the balance sheet and income statement

As noted above, there are three critical parts of a company's financial statements.

The balance sheet, which gives a one-time snapshot of a company's assets and liabilities.

The income Statement , which indicates the business's profitability during a certain period.

The cash flow statement, which acts as a corporate checkbook that reconciles the other two statements. It records the company's cash transactions (the inflows and outflows) during the given period. It shows whether all of the revenues booked on the income statement have been collected.

But the cash flow does not necessarily show all the company's expenses. That's because not all expenses the company accrues are paid right away. Although the company may incur liabilities, any payments toward these liabilities are not record.

A reserve currency is a large quantity of currency maintained by central banks and other major financial institutions to prepare for investments, transactions, and international debt obligations, or to influence their domestic exchange rate. A large percentage of commodities, such as gold and oil, are priced in the reserve currency, causing other countries to hold this currency to pay for these goods.

Holding a reserve currency minimizes exchange rate risk, as the purchasing nation will not have to exchange its currency for the current reserve currency to make the purchase. Since 1944, the U.S. dollar has been the primary reserve currency used by other countries. As a result, foreign nations closely monitor the monetary policy of the United States to ensure that the value of their reserves is not adversely affected by inflation or rising prices.

The post-war emergence of the U.S. as the dominant economic power had enormous implications for the global economy. At one time, US GDP which is a measure of the total output of a country, represented 50 per cent of the world’s economic output.

As a result, it made sense that the U.S dollar would become the global currency reserve. In 1944, following the Bretton Woods Agreement , delegates from 44 nations formally agreed to adopt the U.S. dollar as an official reserve currency. Since then, other countries pegged their exchange rates to the dollar, which was convertible to gold at the time. Because the gold-backed dollar was relatively stable, it enabled other countries to stabilize their currencies.

The U.S. dollar remains the world’s currency reserve, due primarily to the fact that countries accumulated so much of it, and that it was still the most stable and liquid form of exchange. Backed by the safest of all paper assets, U.S. Treasuries, the dollar is still the most redeemable currency for facilitating world commerce. It for this reason that it's highly unlikely the US dollar will lose its relevance any time soon.

The writer is MD & CEO of the Community Bank since its inception. He can be contacted at masihul1811@gmail.com