Understanding Cash Flows Properly
It is human nature to seek short cuts when engaged in any repetitive process. The main purpose of these shortcuts being to save time and expense.
In my other life as a trainer I have observed experienced financial analysts adopt a number of strategies to try to reduce the amount of time they spend evaluating financial statements in order to come up with the required output. Many use pre-prepared spreadsheet models and groups of ratios with which they are familiar.
Less experienced analysts generally seek to oversimplify the task, ignoring important information they do not yet understand and placing too much emphasis on what they believe are the most important numbers. The tendency is to overemphasise and over-analyse what they know about and to underemphasise the source information that is beyond their current level of comprehension.
However, there comes a point where omitting to gain a proper understanding of the task and then failing to complete the analysis fully leads to the wrong conclusions.
I have added the word ‘properly’ to this chapter heading in order to emphasise that it is necessary to acquire a solid understanding of cash flow analysis, accounting theory, business strategy and financial control issues, before drawing conclusions about a business entities cash flows. Those seeking immediate short cuts are going to be disappointed! Although I would always encourage users of this book to read as widely as possible around ...