the importance of cash flow.doc

The Importance of Cash FlowAs we know, it is important for a bank to hold sufficient liquid assets to meet the demands of depositors who may seek to withdraw their funds. For a bank, cash flows are important indicators of its profitability and viability. To be profitable and viable, a bank must have sufficient cash flow to make loans and investment, meet withdraws, satisfy loan commitments and meet other cash requirements. There is no doubt that it is also very important for the whole world economy, an enterprise or a household to keep sufficient liquid cash flow.Cash is like blood, plays an irreplaceable role for the health development of the world economy and the normal operation of an enterprise or a family. Entities can continue operating, the key lies in the source of fund, the flow of cash flow and investment is reasonable. If an entity has adequate cash flow, sound channels to finance funds in business activities, it will be healthy development; otherwise it will stagnate or even fall into the debt crisis. However, maintenance of too high a level of liquid assets could be expensive. Cash balances in particular yield no income, yet will cost the same as any asset to fund. Therefore, cash flow always has been overlooked in the past one century, which resulted in many problems many serious problems.For the world economy, if the cash flow of a countrys national economy is shortage, it will lead to serious consequences.Overview of the major financial crisis which happened in the twentieth century, they are, more or less, related to cash flow.In the 1980s, Latin American counties broke out a debt crisis which startled the whole world. Its broad scope, serious degree and duration have never been seen before in the long history of Latin America. Latin American debt crisis began in Mexico in1982. In 1982, Mexicos foreign exchange reserves fell into dangerously low level. In addition, the unpaid debt due is up to 28.63 billion dollars. However, Mexico has been unable to pay the principal and interests due and called for foreign banks to allow deferred payments, but was refused. Then the Mexico government announced his pay crisis that he was unable to pay the debt due with 19.5 billion dollars on August 12, 1982, triggering the crisis in Latin America.What we can see from this debt crisis are including the following two aspects: on the one hand, Mexico itself was shortage of cash flow as a result of the excessive public expenditure and the relatively serious fiscal deficit; on the other hand, Mexico has tried to fill the fiscal deficit through a large number of foreign debt, but the source of debts was worsening (in the 1980s, the private capital overlook official funds with a high proportion of 70 percent of the total external debt) and the term structure was unreasonable (the major part of debts was short-term debt). Meanwhile, because much debt funds were used in the long cycle and large-scale projects, the borrowing funds could not create liquid funds in a timely manner. These two reasons made Mexico unable to keep enough cash flow to pay off the large debt. Therefore, we can conclude that this crisis has a great relationship with cash flow.After the Mexico debt crisis, Mexico changed its closed development mode gradually and opened to the outside. But in December 1994, a financial crisis reached Mexico. Due to the shortage of cash flow, a large number of banks, financial constitutions and enterprises were on the brink of bankruptcy. In detail, many commercial banks couldnt satisfy the demands of depositors who wanted to withdraw their funds. At the same time, a large number of short-term debt maturity. The entire commercial banking system was faced with a lot of these phenomena was poor financial supervision and the lack of cash flow.Furthermore, in July 1997, the baht devaluation triggered a prolonged financial crisis in Southeast Asia. Southeast Asian financial crisis began in Thailands currency crisis began in February 1997. George Soros, as a representative of speculators, greatly impacted the baht, causing the instability of Thailands financial market. The central bank of Thailand spent 12 billion dollars immediately to intervene in the foreign exchange market and defend baht, triggering the sharp decline of Thailands reserves. Meanwhile, the government failed to come up with an effective solution to resolve this crisis and the number of banks bad and doubtful loans were on the rise. On July 2, 1997, Thailand announced to give up a package and the dollar-linked exchange rate system. Thailands currency crisis quickly spread to other Southeast Asian countries, causing the national currency exchange rate fluctuated. Even the Singapore dollar that has been strong suffered a great impact. For Singapore, its biggest problem was that as the devaluation of currencies of other countries, adding to the repayment burden of debts, the loans to neighboring countries couldnt be paid off, leading many banks of Singapore falling into liquidity difficulties and facing bankruptcy.Actually, the reason why Southeast Asian crisis happened was various. Among them, the unhealthy banking sector is one of the main reasons. However, the most fundamental reason is closely related with insufficient cash flow. If the banking system had been healthy and the management of cash flow had been proper, the banking system wouldnt have been severely affected. Relevant research shows that many banks in Southeast Asia in deciding whether to offer mortgage rather than the borrowers ability to repay principal and interest. This is likely to lead that a lot of money due can not recover, the proportion of the bad and doubtful loan in whole bank loans has kept rising and even to cause the lack of liquidity.At the same time, we should see that speculative capital has impacted the Hong Kong dollars in October 1997 in the Southeast Asian financial crisis.However, Hong Kongs linked exchange rate system remained intact after a fierce storm. The reason was that the mainland of China regarded its huge foreign exchange reserves as liquid cash and provided strong support for the Hong Kong dollar, so as to avoid Hong Kongs economy suffering serious losses. In fact, problems caused by the lack of cash flow even more than these. The outbreak of the global financial crisis in 2008 is a typical example. The global financial crisis is an extension of the sub-prime crisis of the United States. The U.S. sub-prime problem stemmed from the fact that the people who have not full lending capacity were involved in the mortgage-chain. Whats more, the structure of financial derivatives that were established on the sub-prime was very complex. Once the sub-prime borrowers defaulted, the crisis broke out. On September 15, 2008, Lehman Brothers filed for bankruptcy protection. Subsequently, the American International Group and Washington Mutual banks faced closure. The U.S. government quickly announced the two rescue measures: expanding the amount of financing for banks and relaxing restrictions of the guarantee, the Federal Reserve and Treasure injected 70 billion U.S. dollars into the ten banks of Wall Street, which became the largest single-day injecting action after the “9.11”. Its main purpose is to improve the liquidity of the market and promote the growth of the economy. In March, 2009, the U.S. Treasury Secretary Timothy Geithner submitted to Congress anew regulation of financial supervision motion, proposing to change the requirement of cash flow for banks to set aside more money to prevent emergency. From the two rescue measures implemented by the U.S. government, we can learn that the sub-prime crisis occurred precisely because of insufficient cash flow.Reviewed the major financial crisis in the financial history of the 20th century, we can know that Mexico, Thailand, Singapore, Malaysia, Indonesia and the United States have been seriously damaged because of the lack of cash flow; on the other hand , the Hong Kong dollar from the financial crisis because the mainland of China provided adequate founding for it. Therefore, we can draw a conclusion that the cash flow is very important for the world economy and national economy. Besides, the management of cash flow is also necessary.“If the assets of a corporate are not enough to meet it liability, the corporate is not necessarily to be insolvent, but it will certainly be insolvent without the cash flow.” An entrepreneur says. This means that the development of enterprises depends not only on profitability, but also the position of cash flow. Cash flow is available resource and the intrinsic driving force for the development of enterprises. It is indispensable in business activities.W.T. Grant, a profitable business, fell into bankruptcy due to the lack of cash flow. Conversely, Toyota has maintained its cash flow strategies all the time, becoming one of cash flow to an enterprise. The case of W.T. Grant bankruptcy is one of the largest bankruptcy cases in the 1970s. The amount of money involved is more than two billion U.S. dollars. The companys annul sales report showed that its sales continued to increasing and that it reached 1.6 billion dollars in1997. Whats more, the reported profit of the company increased in line with its sales and the growth its profits, while they did not notice the decline in cash flow. The companys cash shortage emerged in 1969, which triggered the bankruptcy of W.T. Grant on October 2, 1975. In this case, the every shop of this company had it own credit policy. These shops usually provided customers with the long credit period which was up to 36 months to pay the remaining amount. So, when its sales increased substantially, the payment of accrued items was very low. Ultimately, the company fell into liquidity difficulty and the ability to maintain daily operations was seriously undermined, which resulted in its bankruptcy.On the opposite, Toyota Motor Corporation was founded in 1937 and it fell into a business crisis in 1949. Furthermore, the company established the non-lending operations in 1987 and then its operating profit exceeded 1 trillion yen in 2002, we can sum up the secret of Toyotas success, perhaps only one, namely: the success of cash flow strategy.In the process of Toyotas growth and development, even when the bubble economy collapsed, Toyota still remained adequate cash flow.Under the impact of the c