Due to the current economic climate, the focus for many – if not all - house building companies has shifted from making profit to retaining cash within the business. This has led to more importance and focus being turned to cash flows as opposed to operating margins. This has been reflected in the write-downs of land and goodwill assets, as house builders react to the poor market conditions and declining values of holdings. This concentration on cash and maintaining a sustainable and acceptable level of cash in the business bank account has prompted a widespread re-use of the phrase “cash is king,” made famous by Alex Spanos, an American real estate developer and self-made billionaire.
An Introduction to Cash Flows
Loscalzo, in his book Cash Flow Forecasting (1982), claims that “in essence, cash flow is the lifeblood of a company and is fundamental to its very existence.” Kenley (Financing Construction, 2003) echoes these sentiments, in stating that “construction industry managers can no longer ignore their strategic cash flow management, nor their prevailing economic conditions…the changes in the economic environment over the last forty years have led to changes in the way the construction industry has managed cash flow.”
Cash is a liquid asset of any business and is of critical importance in any company, as it is used to directly finance short-term operations and acquisitions, as well as making purchases and paying wages to workers and employees. A company may have high profits and increased revenues, but will suffer and are at risk of bankruptcy if sufficient cash is not available for these uses.
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