Why can using a firm\'s working capital to discuss cash flow without further qua

Question

Why can using a firm's working capital to discuss cash flow without further qualification be misleading?
Should the methods of cash flow analysis distinguish between a new capital intensive business and a more mature operation?
Where is funding for pure research available?
The number of companies acquired only two or three years from startup has increased dramatically in the last few years. What are the root causes of these early exits? How much is a customer worth? How much does it cost to acquire an additional one? This is the focus of Peters' plan for a successful early exit when the business model is yet to show any profit. However, investors will also have to consider other factors. Which factors are not covered in Peters' analysis?

Explanation / Answer

Question 1: Working capital represents only the current assets and the current liabilities of the firm. Both the current assets and current liabilities represent the short term assets and liabilities of the firm (that is the assets which are formed and liabilities which are to be paid within 1 year). Focusing on this short term nature can sometimes lead to missing the big picture. Hence its misleading to focus only on firm's working capital to discuss cash flows.

Question 2: Capital intensive business will have large cash investments to be made at the beginning and the benefits will only be seen at later periods or in the long term. For example you make have to make cash investments in the years 1-3 of operation and its benefit will be seen only from year 10. In such cases using only cash flow analysis leads to rejection of project even if it may yield long term value.

Question 3: Funding of pure research mainly happens only through government. Government (Federal government) funding is the largest contributor to pure research as most businesses do not see any way of earning profits through research on the long run.

**Question 4: This question is not of finance domain and hence we cannot answer it. It involves marketing knowledge. Kindly post in the appropriate forum/subject to seek answers**

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.