The relationship between cash flow and investment spending in textile industry

Textile Industry
Share

Cash is important and is the king of every business. Every company has to have cash on hand in order to be able to pay for the goods and services it uses, and consequently, to stay in business. Simply said, that the company has to be practical of managing its day to day operations. Cash management is one of the effective tools to maintain and manage cash.

Profit & Loss statement and the Balance Sheet both reflects the fund movement through a business, the influence they have on value and how they reconcile with cash balances. A cash flow statement reveals mainly how cash flows in and out of a business. Cash flow statements are a condensed version of a balance sheet. In addition to giving a summary of how much cash is available for operations, the cash flow statement also specifies the ways in which the business is generating cash. This divulges about how growth or whether if any growth is occurring. It is disclosed if it is through increasing debt, income etc.

Cash flow from investing activities is the part of the cash flow statement that displays how much money has been used in or created from making investments in a specific time period. Investing activities include purchases of long-term assets, acquiring new businesses, and investments in marketable securities like stocks and bonds.

The cash management in business depends on demand for cash in the company. The objective of liquidity management is to maintain the level of funds in the company to maximize owner wealth and to fulfill the working capital requirements. Cash levels should be maintained to optimize the balance between costs and cash operating costs are sufficient funds. The type and amount of these expenses are specifically part of the company’s financial strategy. In addition to the cash management of the company, cash investment levels suggest increased opportunity costs, which are affected by levels of networking capital. The rise and fall of the networking capital level require a balance of future cash flow and, in turn, leads to changes in the valuation of companies. Liquidity management requires a proper balance of cash and other assets in working capital – receivables and inventory – must be ensured. If the level of liquid assets is not enough, it increases the risk of operating companies – loss of liquidity. Provide working capital generates costs that affect profitability. The decision on how to allocate resources is at the heart of the conflict between shareholders and managers. The risk managers spend most of their time to study the factors that cause cash flow power leverage of influence in the investment decision of a central issue in the field of corporate finance. Also, high prior-year cash flow raises managers’ expectation of current cash flow, and it is this anticipated cash flow that drives investment.

Investment is the most cyclical component of the business decision.  The cash flow theory maintains that, because capital markets are not perfect, many firms rely heavily on internal finance for investment purposes; since cash flow tends to be very procyclical, investment also is procyclical. Investment decision refers to the process of determining which investment projects result in maximization of shareholders value. Investment decisions of a firm are known as the capital budgeting, or also as capital expenditure decision. It is defined as the firm’s decision to invest its maximum operating funds in the long-term assets in anticipation of an expected movement of profits over the years. For instance, expansion, acquisition, upgrading, and replacement of the long-term assets, divestment, modification in sales distribution, an advertisement campaign, research, and development programme and employee training, shares, tangible and intangible assets that create value. Investments in perfect capital markets decisions are independent of financing decisions and, hence, investment policy only depends on the availability of investment opportunities with a positive net present value. Some companies have unlimited access to sources of finance and investment, so firms with opportunities for profitable investment that surpass their available cash flow would not be expected to invest any less than firms with the similar prospects and higher cash flow because external funds provide a perfect substitute for internal resources.

The most important decisions among all the decisions of a finance manager are investment decisions and financing decisions. Both have a major effect on the firm’s performance as well as the firm’s growth. Two major types of researches of finance are used to finance investment i.e. internal and external. Such modes of financing have some problems with them. Firstly, these required some return that may be fixed or variable. Secondly, organizations facing some inherent problems attached to these modes of financing i.e., securities issues, inflexibility, issuance cost, fund availability etc. Usually, external financing and equity financing are discussed in relation to investment in long term assets. In addition to long term debt and equity, internal funds are the most significant source of financing especially in countries where external funds are more costly. Cash flow of an organization is a major measure of its financial strength.

The relationship between cash flow and investment spending are strongly linked to the textile industry. The financing frictions have a significant impact on investment decisions in the textile industry. To maximize the value of textile businesses, investment projects with high profitability are searched for. Profitable projects require appropriate and cheap financing. There are various methods of financing including domestic financing, external financing, or a combination of both. But because of the more expensive external financing, textile companies are more inclined to use resources within the company. The industry faces more difficulties in accessing from external sources. The textile company’s reliance on the internal resources of the company is determined by the sensitivity of investment to cash flow.

The steep decline in cotton prices in the global market recently is causing serious cash flow problems for textile businesses.  The drop in the commodity’s prices has exhausted the mills’ buying capacity and has led to supply shortages. On the one hand, their working capital requirements for procuring raw materials have increased substantially and on the other, the banks are not ready to raise their limits. Banks are reluctant to revise and increase the working capital limits based on cotton’s price a year ago of textile manufacturers fearing casualties because of volatility in the market. In many cases, banks have tightened liquidity of textile manufacturers for fear of losses. They consider their exposure to the textile industry risky in the given circumstances.