Financial Accountant Journal-March-2014

Summarising Financial Data into Short Set of Key
Relationships Using Cash Flow Ratio Analysis
8
By : Zeeshan Hamid - ACFAc
Introduction
Cash flow ratio is more reliable
indicator of liquidity than
balance sheet or income
statement ratios, such as; the
quick ratio or the current ratio.
Lender’s rating agencies and Wall Street analysis
have long used cash flow ratios to evaluate risks,
but auditors have been slow to use them. Some
cash flow ratios compare the resources a
company can muster with its short-term
commitments. Other cash flow ratios measure a
company’s ability to meet ongoing financial and
operational commitments. There is no consensus
on the definition of net free cash flow, although
the authors suggest taking off balance sheet
financing into the account. Auditors can use the
insights uncovered by cash flow ratios to
spotlight potential problem areas, thus helping
them plan their audits more effectively.
Cash flow ratio is also known as; cash flow
forecasting, and cash flow projection. It is the
cycle of cash inflows and cash outflows that
determine business solvency. It is an important
tool, which letting you know, when your
expenditures are too high or when you might
want to arrange short term investments to deal
with a cash flow surplus. It involves the
components of your business that effect cash
flow, such as account receivable, inventory, and
accounts payable. Through a cash flow analysis
you will be able to more easily identify cash flow
problems and find ways to improve your cash
flow. Cash flow ratio analysis is very helpful for
all stakeholders’, investors, creditors, and
management to evaluate a company. It provides
the firm’s conditions and performances.
This is an important analysis, which covers all
corporate finance and financial meetings as well.
Thus, it shows the health of a company. One of
the safest means to safe money is banking sector,
which is providing services to its customers.
This sector lends money to businessmen and
provides various kinds of loans. However, through
this analysis it would be easy for management and
investor to have an idea about the bank position. The
analysis of three banks here will provide an easy
choice to external stakeholders as well.
Banking Sector of Pakistan
A bank is a financial institution and a financial
intermediary that accepts deposits and channels
those deposits into lending activities, either directly
or through capital markets. Banking is generally
highly regulated industry. Banks play a vital role in
the economy, and are considered as the backbone of
an economy all over the world, as well as in Pakistan.
The banking sector plays a significant role in flow of
money and economy.
A bank is an institution, which can generate revenue
in a variety of different ways including interest,
transaction fees, and financial advice. The main
method of generating revenue is via charging interest
on the capital it lends out to customers. Some
economic functions of banks are issue of money,
money creation, maturity transformation, credit
quality improvement, and credit intermediation.
Pakistan’s oldest bank is the State Bank of Pakistan,
which is also the Central Bank of Pakistan. The
country started without any proper banking network
in 1947; however, in few decades banking sector
working effectively. Pakistani banking sector has
remained remarkably strong and resilient during the
world financial crises 2008-09. Stress test conducted
on June 2008 data indicates that large banks are
relatively robust. Today, the banking sector is
providing financial solutions to the masses and is
growing and becoming a solid partner in the
development of the Pakistani economy, this growth
potential has seen different acquisitions in the
banking sector.
Objective of this Study
It is business life’s blood and every manager’s main
task is to use cash flow to generate profits. If a
business is operating profitably, then it should,
generate cash surplus. If it will not generate cash
surplus it will eventually run out and expire.