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Relevancy of cash flow in firm financial management
Author(s) -
Helmers Glenn A.,
Watts Myles J.,
Atwood Joseph
Publication year - 1985
Publication title -
agribusiness
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.57
H-Index - 43
eISSN - 1520-6297
pISSN - 0742-4477
DOI - 10.1002/1520-6297(198524)1:4<311::aid-agr2720010408>3.0.co;2-3
Subject(s) - cash flow , amortization , inflation (cosmology) , loan , cash flow forecasting , economics , finance , business , monetary economics , physics , theoretical physics
The inadequacies of assessing business performance and credit worthiness by short run cash flow under conditions of inflation are stressed in this article. Because of the economic nature of traditional loan amortization, short‐run cash flow cannot be relied on in gauging: (1) true business performance and (2) long‐run repayment capacity. In addition, standard financial performance ratios using nominal flows are shown to be inadequate under inflationary conditions. This article stresses that business performance and credit worthiness analysis should be based on a real monetary basis. An example is provided to demonstrate the necessary modifications of nominal business flows to place the financial analysis on a real basis.