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Over my business career I have seen, read and even written many articles regarding understanding and building cash flow modeling. Cash flow is the life blood of any business. Without adequate cash flow employees may not be paid, suppliers may not ship their goods, landlords may threaten to bolt the doors, and taxes may not be paid in a timely manner.  But yet even with these horrifying threats many business owners still have not taken the position of mastering cash flow modeling, let alone understanding cash flow.

During my banker days, I remember many times I heard comments like – “My business is having a great year. Sales are up, and our new location is generating a lot of traffic. My account receivables are up, but we don’t have enough cash to pay all our obligations, and all I need is a short-term loan”. My reply was generally, “That’s wonderful your business is doing so well. How much do you need and when do you think you can pay it back?” Often, I would hear a reply along the lines, “How much can I borrow and I think I can pay it back in a month or two?” How can a banker make a decision to loan money based on that response?

Cash flow is a somewhat easy process to understand. It is basically the cash on hand plus what collections of receivables will be or cash inflows will be from cash sales less what payments need to be made to suppliers and regular recurring expenses like payroll, rent, insurance, utilities loan payments, etc. If the number ends up being negative, then decisions need to be made as to how much more cash sales can be made, which collections can be sped up or who can be paid at a later time. If the number is positive, then you are good to go. There are other factors that can enter into cash flow modeling, like sale of assets, purchasing of services, etc., but I will not go into those here because it may confuse the basic elements.

Often the preparer of a cash flow model will get hung up thinking this needs to be as accurate as possible, and a lot of time is spent trying to zero in on exact numbers. Cash flow modeling is similar to doing financial projections and forecasts in that it will likely never result in exactly what actually happens. What cash flow modeling is all about is providing a tool that will help the business owner make better decisions about cash, and the availability or lack thereof, with some good modeling or forecasting before a crisis situation develops.

If you need help or assistance with cash flow forecasting or modeling in your business, talk to a business advisor who has knowledge and experience in cash flow analysis. We encourage you to visit our Web-site at www.silverfox.org and learn more about the Silver Fox Advisors, and how they can assist you with your business needs, as well as to discover more about our great programs and community outreach endeavors. 

• Easy to understand.
• It may be consistent with the business’s tax reporting.
• Inexpensive to maintain.

On the other hand, the cash basis financial statement provides minimal information.  An accrual based financial statement provides the business owner with a true picture of the financial position as of the financial statement date. 

Financial statements communicate a company's financial performance, including its profitability, liquidity, and solvency. The information is presented in a standardized format to ensure clarity and allow for comparison across different companies and different periods.

By analyzing financial statements, users can make better decisions. Management can track progress towards goals and identify areas for improvement. 

Financial statements have two major components:

• Balance sheet.
• Income Statement.

The accrual basis balance sheet provides a snapshot of a company's financial position at a specific point in time:

• It shows what the company owns (assets), what it owes (liabilities), and the difference (owners' equity).

• The balance sheet, used with the income statement, also provides key performance indicators (“KPI”) at a glance. For example, if the income statement shows that the previous month’s sales were $250,000 and accounts receivable are $600,000, one can easily determine that there are over two months of accounts receivables.  If the company’s credit terms are due in full in 30 days, one can easily see that management is not timely collecting its receivables.

• The balance sheet is typically shown being compared to a previous period or periods. Such comparison can provide the reader with trends, both favorable and unfavorable.

• Finally, detailed reports are designed to support assets on the balance sheet. For example, the general accounting records should have a detailed listing of accounts receivable and accounts payable. These detail reports total must agree with the corresponding balance sheet amounts.

The accrual basis income statement presents financial activity over a specified period:

• It shows sales, cost of sales, and administrative expenses during that period.

• It is often compared to prior periods or to budgets.

• It works with the balance sheet to provide management with the information to make good business decisions.

Overall, the accrual basis financial statement is a cornerstone of financial reporting, offering valuable insights into a company's financial well-being and future prospects.

The cash basis balance sheet and income statement have common characteristics. The balance sheet provides a snapshot of a company's cash balances at a specific point in time. The income statement recognizes transactions as cash is spent and received.

A cash basis financial statement has several limitations and drawbacks:

• Transactions are reported when cash changes hands. For many important transactions, cash changes hands at a time different from the culmination of the transaction. This results in a financial statement that can be misleading.

• The cash basis financial statement is not compliant with generally accepted accounting principles. A business owner providing a cash basis financial statement would mislead the reader of the financial statements, possibly leading to detrimental results to the reader and to the company.

The cash basis financial statement does not provide a complete picture of a company's financial health, as they don't account for future obligations or revenue earned but not yet received.

In Summary:

The cash basis financial statement has limited value, while the accrual basis is a tool for management to make good business decisions.  Business owners and managers should be careful using “A Work of Fiction.”