Now, it's not only about the quality of earnings but also about the quality of cash flow from operations. December 8, 2003, Forbes article Artificial Sweeteners by Elizabeth MacDonald. Requires free registration
So, within the guidelines of GAAP (generally accepted accounting principles) companies can increase their cash flows from operations through "manipulation".
How?
• By parking idle money in short term securities, selling them, and counting the proceeds as cash from operations rather than cash from investing, a company can increase its cash from operations. Was that income from the company's line of business? I don't think so. One company doubled its cash flow from operations by doing this. Read the article to find out which company was cited as an example.
If a company's cash flow has suddenly increased, this may be the reason. If its cash flow has suddenly decreased, perhaps it didn't make money on its idle cash during the year.
• By delaying the payments of its bills to its suppliers, a company can increase its cash flow from operations on a one-time basis.
Check the number of day's worth of payables on the company's balance sheet. Has the number of days increased from the previous year? This tends to work only once. The company can stretch out its accounts payable only so far, then it simply has to increase sales to improve its cash flow. Once again read the Forbes article to find out which familiar company they used as an example of this activity.
• By selling the company's account receivables (for cash), a company creates a decline in receivables and an increase in the cash flow from operations. This works until the company runs out of account receivables to sell for cash. One company boosted its cash flow 11% by doing this. Find out which one.
The above points may be a reason for significant changes in cash flow from operations----increases (use of the tactic) or decreases (when the tactic no longer works).
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