Forget About Profit,
Cash Flow Is King
In the second quarter of 2011, nonfinancial companies in the Standard & Poor's 500-stock index generated $158 billion in cash flow from their operations after accounting for capital spending, a 13.6% increase from a year earlier, according to data gathered by S&P Capital IQ.
The figure also represents a 60.4% increase from the first quarter of 2009, a recent low, as companies navigated the depths of the recession.
That improvement is a testament to the pains U.S. companies have been taking to ensure their cash is coming in more quickly than it's going out.
The ability to generate cash may be the most important measure of a business's health.
Plenty of companies with paper profits have failed because they lacked the cash to keep operating.
At the most basic level, companies improve cash flow by collecting receivables more quickly and paying bills more slowly. If money is going out faster than it's coming in, a company must find a way to fund operations for those days in between.
The choices include cash on hand, bank financing or funds raised in the capital markets. The recent credit crunch threatened to stall even profitable companies because it left the latter two options so badly impaired.
One advantage to tracking cash flow from operations is that it has a clear accounting definition. That means it can be compared on an apples-to-apples basis from company to company.
Cash flow can also serve as the basis for calculating the corporate equivalent of disposable income. Subtracting capital expenditures—or critical investments in things like plants and machinery—from a company's cash flow shows how much of its resources are left available for such purposes as paying dividends, financing buybacks, making acquisition or funding other investments.
— Matthew Quinn
https://www.wsj.com/articles/SB10001424052970204524604576609740825745286
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