Question

The three key cash-related activities of a firm are operational activities, non-current activities and financing activities. Which one is the most important to a firm and why?

Answer 1

Three three cash flow activities namely, operational, non-current and financing are each important to a firm as each activity has its own role as mentioned below:

Operational activity cash flows mainly relate to the income and expenses from the business operations i.e. cash inflows from sales and cash out flows towards vendor payments or marketing and administration expenses.

Non-current activity cash flows relate to cash outflow towards purchase of non current assets or cash inflow towards sale of non current assets. Eg purchase of machinery or land.

Financing activity cash flows relate to inward or outward flow of cash towards any financing activity namely, sale of shares, clearing debts, dividend payment etc.

Out of the three, Operational activity cash flow is the most important due to following reasons:

1. It relates to core business activity cash flow, how much the firm earns and spends towards it core business process

2. Positive or negative operational cash flow defines the health of the firm

3. After the operational cash flow identification, the firm can decide for its non-current and financing activities based on cash surplus or lag in operational cash flow

4. Positive and higher operational cash flows send good signal to investors and signifies that business is profit making and sustainable