The cash flow statement tells the readers about the cash receipts and cash payments of the business during a particular period of time. The sources of cash range from customer payments, loans, asset sales, and equity issue. Similarly, the uses of cash may include purchase of equipment, payments to suppliers, and employee salaries. While many uses of cash involve expenses, expenses do not always necessarily involve cash. One major example is depreciation which is an expense but doesn’t involve cash outflow. The cash flow statement is important because it tells the readers how efficiently the business is managing its liquidity. While profitability is important, liquidity may be even more important and without liquidity, even the most profitable businesses on paper may go out of business. Not only investors are interested in examining a business’ cash flow statement but other stakeholders such as lenders also consult it in deciding whether to approve a loan application (Thompson & Buttross, March 1988).
As far as Ford’s cash flow statement is concerned, the company’s net cash provided from operations declined from $9.784 billion in 2011 to $9.045 billion in 2012 (Ford, 2012). One of the major reasons may be an increase in receivables we observe in the balance sheet. 2012 was a difficult year for Ford as opposed to 2011 and it is likely that the company adopted more generous attitude towards credit extension to consumers which explains the decline in cash inflow from operations.
As far as investing activities of continuing operations are concerned, cash outflow due to capital expenditures increased from $4.293 billion in 2011 to $5.488 billion in 2012. One likely reason may be greater investment spending in emerging economies where most of the future growth is expected to come. A WSJ article does confirm that Ford opened a new car plant in China in 2012 (Shirouzu, 2012). But the greatest sources of cash inflow and outflow were transactions related to securities. The company’s cash outflow related to purchase of securities was $95.135 billion in 2012, a significant increase from $68.723 billion in 2011 and similarly the cash inflow from sales and maturities of securities was $93.749 billion, once again a significant increase from $70.795 billion in 2011 (Ford, 2012). This trend may be due to the fact that Ford is struggling to find opportunities where it can put its cash to use and one strategy it has come up with is to convert cash into securities that may earn some return. This strategy is better than having the cash lying around and earning nothing.
As far as financing activities are concerned, the company paid dividends of $763 million while none had been paid in the previous two years. It also lends credibility to the hypothesis that Ford’s management may be finding it challenging to find opportunities that are worth investment. As a result, management may have decided to return some of the cash to the shareholders. Another thing the company did in 2012 that it had not done in the previous two years was buying back company shares which totaled $125 million in 2012. This may be due to the fact that Ford’s management believed company stock is underpriced and it may be a good strategy to buy back some shares. The cash inflow from short term debt was $1.208 billion which was below 2011 level of $2.841 billion and similarly, cash inflow from other debt was $32.436 billion and still below 2011 level of $35.921 billion. It again shows 2012 was a challenging year and business was little slow which likely reduced need for debt funding.
- Ford. (2012). Form 10-K. Delaware: Ford Motor Company. Print.
- Shirouzu, N. (2012, February 27). Ford Faces China Hurdles. The Wall Street Journal. Print.
- Thompson, J. H., & Buttross, T. E. (March 1988). Return to Cash Flow. The CPA Journal,, pp. 30–40. Print.
