Measuring cash flow flexibility of companies: The cumulative index-difference

Abstract

Cash is king. Even a highly profitable company can find itself in search of financing due to a lack of cash to honour its obligations. If this situation is only temporary and external sources of finance are freely available, this cash flow obstacle does not have to be detrimental to the stakeholders of the company.However, if the poor cash position of a company is not temporary, but rather an integral part of its structure and a result of its strategy, stakeholder interest may be at risk. Although insolvency is seldom the outcome, such companies find themselves struggling because of their cash flow inflexibility.The cumulative index-difference aims to identify companies that are cash flow inflexible, in order to enable stakeholders to take timely measures to prevent a negative outcome. With adjustments in strategy and preventative measures taken, the cash flow positions can be improved to prevent a disaster.

Cash flow reporting: Do listed companies comply with AC 118?

“…Trends in the flow of cash, the use of models to predict future cash flows and relationships between cash flows and profits are some of the applications of cash flow information. Steyn, Hamman and Smit (2002) developed the cumulative index-difference, which aims to identify companies that are cash flow inflexible. The cumulative index-difference is based on the relationship between an adjusted net profit after taxation (PaTbDA) and the cash flow from operating activities before the deduction of dividends (CFObDiv).…”

Revamping the cash flow statement

“…The traditional cash flow from operating activities contributes to identifying companies that are cash flow inflexible (Steyn, Hamman and Smit 2002). The weakness is that, although the cash employed in operating assets is included in the cash flow from operating activities, the cash utilised to maintain the nonoperating assets is not included in the calculation.…”