Cash Flow (Sprague, 2008). A Research Proposal

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A second challenge organizations face with cash flow management is being realistic with the amount of time it will take for them to receive revenues. This negatively affects cash flow projections that Sprague illustrates as being very important to a company's success. Companies are become slower and slower to pay their vendors, with 45 to 60 days becoming more the norm than the traditional 30 days, according to Feldman, as cited by Spargue. The third and final challenge to cash flow management is the lag in time between when payment to suppliers and employees comes due and the time in which revenues are received from customers.

Summary:

Sprague (2008) gives a fairly comprehensive overview of cash flow, with this article. The author begins with the history of cash flow reporting and the cash flow statement. Sprague describes how cash flow reporting has transformed from being an option that had begun to catch on as effective in the 1960s to today's now mandatory requirement, as issued in FASB No. 95, stating that cash flow statements must be included with the income statement and balance sheet, in an organization's annual report to shareholders. FASB No. 95 is covered briefly, with a discussion of the required cash flow measurements. The two types of reporting -- direct and indirect -- are discussed; however there are questions that the author raises in their statement of facts, yet doesn't address.

Sprague (2008) comments that an overwhelming majority utilize the indirect method of reporting cash flow. Yet, this method, according to Sprague, "provides the least useful information for investment decisions" (p. 3). The author fails to describe specifically why the indirect method yields such useless information. Nor does she give a reason why so many organizations choose this method of reporting or why, if it doesn't effectively provide information, is it an option at all. An explanation of why the indirect method is preferable in some instances, despite the drawbacks, would have added another dimension to this section.

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Despite this interesting historical background, the remainder of the article brought the author's point home, regarding the importance of proper cash flow management.

The challenges corporations face in managing cash flow are briefly detailed and the sections that caused the most concern. Sprague (2008) highlights the most common areas where organizations often have issues. One of the challenges she describes is the lag time between when an organization must pay suppliers and employees and the time that they actually collect revenues from their customers. Sprague states, "The solution is cash flow management and the idea is to delay outlays of cash as long as possible, while encouraging those who owe you to pay quickly" (p. 3). Allow this is the strategy that many may use -- pay slowly, collect quickly -- sadly, Sprague fails to make note that this is where much of the problems in cash flow management stem from, with suppliers and customers of an organization following this same strategy. It's difficult for an organization to collect their money quickly if a customer is trying to pay as slowly as possible, which leads to the organization having few other choices but to pay their suppliers slowly, who then in turn may have to pay their suppliers slowly. This can then lead to another challenge Sprague notes -- coming up short on cash on hand. Organizations then have to rely on credit to pay their suppliers, which leads to increased costs for the organization, in interest fees, and an overloading of debt. One only has to look at the current state of the economy to see the true dangers of using this 'robbing Peter to pay Paul' type of strategy by incurring credit bills to pay off other bills. Not once does Sprague note the danger in this strategy, but instead describes it as being common and acceptable. The author misses an opportunity to give readers an important lesson in how cash flow management of.....

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