Financial Accounting Blog

Thursday, November 06, 2003

The following Internal GE Article provides advice on Cash Flow for personal finance and for large corporations such as General Electric.

GE has 13 businesses that together generated more than $15 billion of cash in 2002 (excluding progress collections). Each of them has “paychecks” coming in and bills going out. "The ability to predict your cash on hand over a period of time, or cash flow, is vital to your personal finances and critical for the health of a multi-billion dollar organization."
Cash flow measures how much cash the company will have at its disposal at any given time after it pays expenses such as payrolls, bills, property taxes and supplier invoices. Items such as inventory, accounts receivable and property may be converted to cash at some point, but it takes cash on hand to pay suppliers, pay the rent, and meet the payroll. A positive cash flow (when cash coming into the business is more than the cash going out) is critical for the long-term vitality of any organization because it fuels growth through investments in new products and technologies, R&D and acquisitions.

According to Jeff Immelt, “cash allows for investment and value creation today…and tomorrow. Without cash, [GE] would be missing out on opportunities to grow and to fund our strategic growth initiatives, such as acquisitions and research & development investment.” Jeff adds that cash is sign of a vibrant, strong company; an attribute that many investors consider to be almost as important as earnings per share.

Through focus on higher Returns on Total Capital (ROTC) and reduced inventories, cash flow can grow and allow the company to further expand technology investments to come up with the next great idea in products and services.

Joseph Thodiyil