Basic Cash Flow Principles

Accruals, Accounts Payables and Other Current Liabilities impact Ending Cash and Cash Flow exactly like Accounts Receivable and Inventory do (except in opposite directions). Saying that Accruals don’t impact Cash Flow is like saying AR doesn’t impact Cash Flow… and we all know that is just wrong.

When a business doesn’t pay its bills, it creates a liability on the balance sheet. When liabilities go up from one time period to the next, that is good for cash. (This is obvious because you had an expense on the Income Statement, but didn’t use your cash). Conversely, when AR goes up from one time period to the next, that is bad for cash. (Again, this is obvious because the business has made the sale, recorded the revenue on the Income Statement, but does not have the cash from that sale in its bank account… the cash is still in the customers bank account… which is why it is called “Accounts Receivable”.)

Big picture: Transactions that increase Assets on the Balance Sheet from one time period to the next are bad for cash and the Cash Flow of a business. Transactions that increase Liabilities on the Balance Sheet from one time period to the next are good cash and the Cash Flow of a business.

However, not all cash is created equal. Different transactions will impact the three different types of Cash Flow (Operating, Investing, Financing) differently. Knowing which is which is critical to managing the cash and Cash Flow of a business.

I highly recommend The Ultimate Blueprint for an Insanely Successful Business by Keith J Cunningham as a resource to help anyone understand Cash Flow.

I would also highly recommend this client ask their CPA advisor for some instruction on Cash and Cash Flow.

Of course a third option is for this client to enroll in our upcoming 4 Day MBA in Austin Texas (April 1-4). Understanding this stuff is critical to running the business end of a business and avoiding the “Dumb Tax”.