Cash Flow Stats Stabilize, but Revenues Signal Economic Slowdown
While cash flow trends stabilized in the most recent readings from the Georgia Tech Financial Analysis Lab, a continued decline in company revenues and a drop in capital spending suggest a looming economic slowdown for the U.S.
The lab, led by NACM Graduate School of Credit and Financial Management (GSCFM) Instructor and Georgia Tech Accounting Professor Charles Mulford, examines cash flow trends on a quarterly basis, measuring free cash flow, meaning a company's discretionary cash flow that can be used for acquisitions, debt retirement, stock buybacks and dividends without affecting the firm's ability to grow and generate more revenue. Each quarterly report produces a free cash margin index by surveying nearly 3,000 companies, all with a market capitalization of at least $50 million, and dividing their free cash flow by their revenue.
Put simply, according to the report, the second quarter of 2013's decline of 1.39% from the prior quarter and decline of 2.19% from the prior year signal a slowdown for the U.S. economy, as the reduction in selling, general and administrative (SG&A) expenses and capital spending observed in recent reports is not sustainable in the long term. "Free cash margin has ticked up, just as it did during the recession, but for all the wrong reasons," the report warned.
"As we complete this report, so-called 'nonessential' operations of the U.S. government remain closed as members of Congress debate aspects of the Affordable Health Care Act specifically, and overall government spending generally. Making discussions difficult is the added pressure of the upcoming debate focused on increasing the debt limit," the report said. "Such high-level brinksmanship does not foster business confidence and weighs on business activities."
- Jacob Barron, CICP, NACM staff writer
A full copy of the most recent report can be found here and a more in-depth version of this story is available in this week's eNews at http://www.nacm.org/enews.html#3.