Statement of Cash Flows – Today’s Scarlet Letter.
The following may be a bit controversial given that large corporations in various sectors are posting increased earnings. Just heard an Internet news alert: Big multinational companies are beginning to stockpile cash. “ Hey, what do they know, that I don’t?” From several of my small manufacturing clients I have heard: “The bulk of my accounts receivable are 60 to 90 days out.” My world: “checks in the mail”….two weeks later…. “check’s in the mail”….. I thought I had “60 days.” What is a million dollars of adjusted gross earnings worth if you have an $875,000 negative change in cash flows for the same period? Cash flow, not revenues pays the light bills. I hear investment strategists reporting earnings but not discussing cash flow.
Arbinger: I wanted a small replacement part for my dishwasher – “that’ll be about 60 days before we get it in.” New photocopier? “You will need to order it now because there is at least a 3 to 6 month lead time.”
The material supply chain is wrecked. The national news generally talks about only the national labor shortage, and infrequently the supply chain, but what about cash flow? Cash flow is the embarrassing economic malady that is not discussed in polite company.
Peter to pay Paul cycle: Cash Flow is affected not only by the current labor shortage and the supply chain backup, but in addition by: a) people’s credit ratings having been obliterated and b) the “rob Peter to pay Paul” approach that many small businesses undertook to survive during the pandemic.
Economic Hangover: Lack of cash flow is one of the “economic hangovers” of the Covid economic crisis. It is the “scarlet letter” in the bottom left drawer of your desk.
Net 30/Net 45: In my transactional merger/acquisition world 100% “cash on the barrel” at closing has always been worth more than 60% down, and 40% over five years. To quote Mr. Gibbs (Pirates of the Caribbean): “Ah Jack, [life] is a gamble at long odds.” What if the concept of early payment discounts (around for many years) is given a name Covid-19 discounts? When I hear that the big boys are stockpiling cash, they certainly must be bringing in their sails, no matter what the national pundits say.
Net Operating Loss Carryforward: Many businesses in 2019 and 2020 had operating and taxable losses. There is a risk and expense of filing an amended tax return in order to claim an NOL carryback. Instead, many small businesses will opt for an NOL carryforward. Hopefully, the national NOL carryforward will create some needed cash flow, but I am uncertain how that will translate into a month-to-month boost for your local, small size business. Your friendly neighborhood tax accountant most likely will become one of your most important business advisors during the next 5 years.
Debbie Downer: No one wants to be a “Debbie Downer” regarding the economy. I am just trying to connect the dots at the small business level. I operate a small business and 99 46/100% of my commercial clients are small businesses. Big boy earnings aside, what portion of small businesses had reportable taxable earnings in 2020? The answer
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