MBA Boot Camp: The Cash Flow Statement & Accrual (2.4)
Concepts & Vocabulary
Accrual Accounting: Recording revenue when a sale is made, and expenses when they are incurred, regardless of when the cash actually changes hands. (This is standard for all big businesses).
Cash Accounting: Recording revenue and expenses only when cash actually hits the bank account. (Used by freelancers and very small businesses).
Burn Rate: How fast a company is spending its cash reserves before generating positive cash flow.
Core Lesson: Why Profit Does Not Equal Cash
Because of Accrual Accounting, the Income Statement can lie to you.
Imagine you run an agency. In December, you sign a $50,000 contract, do the work, and send the invoice. On your Income Statement, you record $50,000 in Revenue and show a massive Net Income (Profit). But the client has 90 days to pay you. In January, you have to pay your employees, but you have no actual cash in the bank. You are profitable, but you are broke.
This is why we need the Cash Flow Statement. It strips away the accounting rules and simply shows cash moving in and out. It has three sections:
Operating Activities: Cash generated by the core business (selling things, paying salaries).
Investing Activities: Cash spent on long-term assets (buying a new warehouse, purchasing equipment).
Financing Activities: Cash from investors or banks (getting a loan, paying dividends).
The Golden Rule: A profitable company can absolutely go bankrupt if they run out of cash. Cash is oxygen.
