Relevancy of cash flow in firm financial management

Glenn A. Helmers, Myles J. Watts and Joseph Atwood
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Glenn A. Helmers: Professor of Agricultural Economics, University of Nebraska, Postal: Professor of Agricultural Economics, University of Nebraska
Myles J. Watts: Associate Professor of Agricultural Economics, Montana State University, Postal: Associate Professor of Agricultural Economics, Montana State University
Joseph Atwood: Research Technologist, Department of Agricultural Economics, University of Nebraska, Postal: Research Technologist, Department of Agricultural Economics, University of Nebraska

Agribusiness, 1985, vol. 1, issue 4, 311-331

Abstract: The inadequacies of assessing business performance and credit worthiness by short run cash flow under conditions of inflation are stressed in this article. Because of the economic nature of traditional loan amortization, short-run cash flow cannot be relied on in gauging: (1) true business performance and (2) long-run repayment capacity. In addition, standard financial performance ratios using nominal flows are shown to be inadequate under inflationary conditions. This article stresses that business performance and credit worthiness analysis should be based on a real monetary basis. An example is provided to demonstrate the necessary modifications of nominal business flows to place the financial analysis on a real basis.

Date: 1985
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Persistent link: https://EconPapers.repec.org/RePEc:wly:agribz:v:1:y:1985:i:4:p:311-331

DOI: 10.1002/1520-6297(198524)1:4<311::AID-AGR2720010408>3.0.CO;2-3

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