Question

If company has forecasted growth in its earnings but its operating cash flow is declining. Provide 3 reasons for declining operating cash flow.

Answer 1

Solution:

There is possibility that company has forecasted growth in its earnings but its operating cass flow is declining. The reasons for declining operating cash flow are as under:

1. Company might provide longer credit period to customers, as a result company can predict growth in earnings but declining in cash flow as company's sales revenue got blocked in accounts receivables.

2. Credit period is not provided or very short credit period offered by suppliers. In such case, company need to pay for all of its purhcases and operating cash flow will decline.

3. Increase in non operating income like sale of investment/fixed assets results in growth in earnings, but it will not increase operating cash flows.