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Cash Flow Problems Can Kill Profitable Companies

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  • Derrald Stice
  • Earl K. Stice
  • James D. Stice

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.

Suggested Citation

  • Derrald Stice & Earl K. Stice & James D. Stice, 2017. "Cash Flow Problems Can Kill Profitable Companies," International Journal of Business Administration, International Journal of Business Administration, Sciedu Press, vol. 8(6), pages 46-54, September.
  • Handle: RePEc:jfr:ijba11:v:8:y:2017:i:6:p:46-54
    DOI: 10.5430/ijba.v8n6p46
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    Cited by:

    1. Derrald Stice & Earl K. Stice & James D. Stice, 2023. "Five Common Finance and Accounting Problems of Start-Up Companies," Journal of Economic Analysis, Anser Press, vol. 2(2), pages 70-77, April.

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