Reading Financial Reports For Dummies, 4th Edition

Chapter 15

Examining Cash Inflow and Outflow

IN THIS CHAPTER

Discovering the ins and outs of accounts receivable

Considering the nuts and bolts of accounts payable

Digging into discount offers

Is the money flowing? That's the million-dollar, and sometimes multimillion-dollar, question. Measuring how well a company manages its inflow and outflow of cash is crucial to being able to stay in business. Cash is king in business — without it, you can't pay the bills.

In this chapter, I review the key ratios for gauging cash flow and show you how to calculate them. In addition, I explore how companies use their internal financial reporting to monitor slow-paying customers, and I discuss whether paying bills early or on time is better — and how you can test that issue.

Assessing Accounts Receivable Turnover

Sales are great, but if customers don't pay on time, the sales aren't worth much to a business. In fact, a customer who doesn't pay for the products they take is no better for business than a thief. When you're assessing a company's future prospects, one of the best ways to judge how well it's managing its cash flow is to calculate the accounts receivable turnover ratio.

A balance sheet ...