NET CASH FROM THE BUSINESS ACTIVITY – THE INSTRUMENT FOR MEASURING THE QUALITY OF BUSINESS GAIN

Abstract

Introducing of the fair value have led to acknowledging and presentation in the income statement of the gains that were not market-verified, which have resulted in increased difference between the amount of the business gain and the net cash from the business activity. Not only these gains were not accompanied by the cash inflows in reporting period, but it is not even certain if and in what amount the future cash inflow would be generated on that basis. This makes more complex the interpretation relative between these two indicators of the company’s success.

The need to provide, by using these two measures, a more reliable assessment of the movements of result and net cash from the future business activity and to create an opportunity for identifying of results, at identification of which were used a measures of “creative accounting” have led to establishing of concept of indicator referred to as “extra cash margin”, i.e. ECM. This indicator is considered as very useful instrument for measuring of relative growth of rates of business gain and net cash from the business activity. Based upon the changes of the ECM’s level in longer term, it is possible not only to evaluate the financial position of the company, but also to give a highly reliable prognosis of movement of the business gain and net cash from the business activity in future.