FAM ASSIGNMENT

MBA 1 - SBL

FAM ASSIGNMENT

[Instructor's Name]

MBA 1 - SBL

FAM ASSIGNMENT

Question # 1

Poor Cash Flows

Some businesses run aground because the owner has difficulty understanding the financial condition of his or her business. It is critical to have a thorough understanding of the cash flow, which is a snapshot of the business's financial condition. Also look closely at the income statement, which includes revenues, expenses and whether or not the business is making a profit. The chief executive or the owner should get to keep track of the financial information daily, or at least quarterly. When businesses find themselves in a bind, they often focus more on controlling their expenses. But scrutinizing expenses is just as important in the good times as the rough times. When business is improving, we see a lot of companies that lose focus on their cash flows. They assume that if things are getting better, the pressure is off. The result is that profits erode. The trick, of course, is to watch both sides of the coin, revenue, and expenses. The importance of staying on top of the financial status of the company cannot be overstated. One might assume that problem is limited to small businesses, but that is not true. One sure way to keep your financial house in order is to have a thorough and regularly updated business plan. The business plan should describe the nature of the business, what the business needs to do to be successful, and how the business will implement those key items. Part of this plan is an analysis of cash flows that addresses the liquidity requirements of the company. The cash flow analysis should also explain how the business plans to address future liquidity requirements.

Traditionally, investors and the financial press have paid much attention to earnings forecasts. However, the informational needs of investors are not confined strictly to earnings forecasts; financial analysts provide a variety of other forecasts. Analysts provide cash flow forecasts in addition to earnings forecasts because cash flow information is useful in understanding the implications of current earnings on future cash flows and in assessing the financial viability of companies.

DeFond and Hung (2003) concluded that financial analysts are more likely to provide cash flow forecasts to companies with large accruals and companies in financial distress. In an international setting, Companies situated in weak investor protection countries are more liked by the analysts of future cash flow forecast than the companies in strong investor protection countries, stated by DeFond and Hung (2007). These findings indicate that the demand for cash flow forecasts tends to be high when earnings forecasts do not provide adequate information on future cash flow prospects. However, firm characteristics alone do not sufficiently explain why some analysts provide cash flow forecasts for a firm, whereas others do not do so for the same firm. Subsequent studies have found that individual characteristics, such as forecasting experience, brokerage house size, and the number of firms and industries followed, affect the provision of cash flow forecasts by ...