The importance of using the statement of cash flows to assess the company's liquidity by Anthony Aguirre

Core value of cash and real liquidity generation

anthonyaguirre0815 — 2025-10-16 15:23:37 UTC

Wisan's article clearly states that cash is a company's most liquid asset, and that the statement of cash flows reveals the actual cash inflows and outflows resulting from operations, investments, and financing. This approach provides a more accurate measurement of liquidity, reflecting the company's true financial position, unlike accrual-based financial statements (such as the income statement), which may include revenues or expenses that have not yet been realized as cash.

This approach emphasizes the generation of operating net cash flow as a key indicator: if operations consistently generate net cash, the company demonstrates its ability to meet its obligations, operate normally, and maintain readily available liquidity.

Critical delimitation of the contribution of the investment flow

anthonyaguirre0815 — 2025-10-16 15:38:34 UTC

According to Wisan, investment cash flows do not always significantly affect short-term liquidity, which means their impact can be considered "partially negligible" with respect to immediate liquidity. In an academic analysis, this should be interpreted with caution: although investments represent cash outflows, they can be strategic for medium- or long-term growth, expansion, or productivity improvements, meaning that evaluating liquidity solely in the short term could lead to a biased view.

Therefore, a rigorous analysis should consider the nature and time horizon of the investments: distinguishing between necessary, recurring, strategic, or extraordinary investments, and their implications for future financial sustainability.

Financing: risk, coverage and liability

anthonyaguirre0815 — 2025-10-16 17:00:50 UTC

While financing can provide immediate liquidity and thus temporarily improve the cash position, it also entails future obligations, liabilities, financial costs, and leverage risks. The statement of cash flows reveals financing movements (borrowing, debt payments, capital issuance or withdrawal), but its interpretation requires consideration of the financial structure: liabilities, maturities, future repayment capacity, sustainable debt, and other factors.

From an academic perspective, liquidity analysis based on cash flows should be combined with solvency, leverage, working capital, and debt-to-equity ratio indicators to assess not only current liquidity but also financial resilience.

Methodological advantages of the statement of cash flows and its limitations

anthonyaguirre0815 — 2025-10-16 17:12:32 UTC

The statement of cash flows offers clear advantages: objectivity (it records actual cash inflows and outflows), transparency (it reveals the origin and actual use of resources), and usefulness for assessing liquidity, cash generation, and internal financing capacity. Furthermore, for entities subject to international accounting standards, its standardized presentation promotes comparability and transparency.

However, from a critical perspective, its exclusive use can generate a partial view of financial health: it does not reflect contingent liabilities, long-term risks, capital structure, macroeconomic volatility, or elements that could compromise future liquidity. Therefore, its interpretation should be part of a multidimensional analysis that includes the balance sheet, income statement, and other indicators.

Dynamic evaluation: the importance of longitudinal analysis

anthonyaguirre0815 — 2025-10-16 17:20:52 UTC

For the Cash Flow Statement (CFSS) to fulfill its role as a rigorous liquidity assessment tool, analyzing a single period is insufficient. A longitudinal analysis over several periods is necessary to observe trends, consistency in cash generation, seasonal variations, operating cycles, changes in working capital, sustained investment, indebtedness, and responses to external shocks.

This approach allows for the identification of whether liquidity is structural (resulting from a sustainable business model) or cyclical (resulting from extraordinary operations, temporary financing, or one-off sales).

For the Cash Flow Statement (CFSS) to fulfill its role as a rigorous liquidity assessment tool, analyzing a single period is insufficient. A longitudinal analysis over several periods is necessary to observe trends, consistency in cash generation, seasonal variations, operating cycles, changes in working capital, sustained investment, indebtedness, and responses to external shocks.

anthonyaguirre0815 — 2025-10-16 17:26:11 UTC

This approach allows for the identification of whether liquidity is structural (resulting from a sustainable business model) or cyclical (resulting from extraordinary operations, temporary financing, or one-off sales).

Wisan's article (2023), along with recent studies from 2024 and 2025, demonstrates that the statement of cash flows is an essential tool for assessing a company's true liquidity. Its value lies in its ability to reveal actual cash movements, allowing companies to measure their capacity to generate internal resources, cover obligations, finance operations, and plan investments.

anthonyaguirre0815 — 2025-10-16 17:37:07 UTC

For companies in emerging or volatile market contexts, such as many in Latin America, the rigorous use of the EFE can make the difference between managing short-term liquidity and building financial sustainability in the medium and long term.