Cash Flow Problems Can Kill Profitable Companies

23 Pages Posted: 25 Oct 2017

See all articles by Derrald Stice

Derrald Stice

University of Hong Kong - Faculty of Business and Economics - Accounting Area

Earl Stice

Brigham Young University; Nazarbayev University

James Stice

Brigham Young University

Date Written: September 2017

Abstract

Although the cash flow statement has been required in public financial reports since 1988 in the United States (and since 1994 according to International Financial Reporting Standards), these important cash flow data are still often overlooked in standard financial analyses. Accounting net income measures economic performance which does not necessarily match up with the timing of cash flow. Many profitable businesses have been killed by cash flow problems, often in the start-up phase. A business has three types of cash flows: operating, investing, and financing. A key measure of cash flow health is free cash flow, the amount of operating cash flow generated in excess of the cash needed for important spending such as for capital expenditures. Managers must pay particular attention to the difference in timing between when cash is collected from customers from the sale of inventory and when cash must be paid to suppliers for the purchase of that inventory. A significant discrepancy between those numbers indicates a potential cash flow problem. Managers and owners of a business that is burning through cash spend much of their time worrying about cash flow survival and are therefore distracted from making the tactical and strategic decisions important to the long-run success of their business.

Keywords: Operating Cash Flow, Start-up Companies, Free Cash Flow, Accrual Accounting

Suggested Citation

Stice, Derrald and Stice, Earl and Stice, James, Cash Flow Problems Can Kill Profitable Companies (September 2017). Available at SSRN: https://ssrn.com/abstract=3057698 or http://dx.doi.org/10.2139/ssrn.3057698

Derrald Stice

University of Hong Kong - Faculty of Business and Economics - Accounting Area ( email )

Hong Kong, HK
China

Earl Stice (Contact Author)

Brigham Young University ( email )

Provo, UT 84602
United States

Nazarbayev University ( email )

53 Kabanbay Batyra Avenue
Astana, 010000
Kazakhstan

James Stice

Brigham Young University ( email )

Provo, UT 84602
United States

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