One of the most important theories cash flow is concerned to see your business through two perspectives: the cash scheme and the accrual basis. Let's look at each method below:
1) Cash Regime:
It is analyzing the financial movements of your company by what went in and out, regardless if that was in the expected period or not. Let's say you had to get $ 5.000,00 from a client during 6 months, but he delayed everything and only paid in the last month. In this case, your cash flow would look like the image below:
Positive point: The importance of cash flow vision, which is precisely done within the cash scheme, is the visualization of the money that the company actually owns in cash, as the name already says. This is important for managing the liquidity (ability to pay your commitments) of the business. For many times, the company has a good projection of the future, but in the short term is in bad conditions. For this, it is necessary to calculate the working capital, topic of a next post.
Negative point: The problem with cash view is that you can not gauge the actual operating result of the company. In the above case, for example, if this project is the company's sole source of revenue, it would be negative for 5 months and then it would appear to have an incredible result in the month 6. What can also happen, is the opposite case, the customer having paid everything in sight, the managers think they have a lot of cash and spend everything without visualizing that they need this money to live for another semester.
2) Competency Regime:
It is analyzing the financial movements of your company according to the period they should have been fulfilled, regardless of when they actually were. Let's use the same case above, the client should pay you $ 5.000,00 per month, but paid everything only in the last month. In this case, your statement of income for the year would be as follows:
Positive point: Under the accrual basis (DRE), you can see if your company's financial structure is correct and whether the current business model makes sense without getting carried away by the long-term fluctuations.
Negative point: Since the statement of income is not concerned with what is actually occurring in the company, you may end up running low on cash and incurring unnecessary debt. In the above case, for example, this would have happened.
Both visions are necessary and complementary in the financial management of a business. The data should always be analyzed by the two perspectives in order to obtain the best possible decision for the company's situation. In addition, to obtain this type of management system is necessary the use of some software or spreadsheet so that the launchings are registered in both optics.