How is cash flow treated in the decision-making process?

In the context of decision-making, especially in performance management and financial analysis, the treatment of cash flow is integral to evaluating the viability of projects or investments. Cash flow is considered relevant because it represents the actual inflow and outflow of cash that affects a company's financial health and liquidity.

Choosing cash items specifically acknowledges that only transactions that involve cash movements should be included in the decision-making process. This means assessing revenues received, expenses paid, and investments made that directly influence the cash available to the business. Depreciation, while it is an accounting expense that reduces taxable income, does not involve an actual cash outflow during the period it is recorded. As such, it is not considered relevant in cash flow analysis.

In summary, focusing solely on cash items, while excluding non-cash expenses like depreciation, provides a clearer picture of the company’s cash position and helps managers make informed decisions based on actual financial performance rather than accounting metrics that do not impact cash flow. This clear distinction is vital for effective financial analysis and decision-making.