Accrual Accounting and Cashflow


Before the end of World War 1 most managers kept track of cash out and cash in. many senior citizen owner-managers still do today. There is an inherent problem in keeping the records that way, however, if the business offers and receives much credit. Doing business on credit displaces the time of the exchange of cash from the exchange of goods and services. Sometimes very little cash comes in during a particular month and very much cash comes in during other months. The same is true of cash out.

Keeping in track of what you pay or get paid for credit transactions causes the monthly reports describing the operations to fluctuate from month to month even though the goods and services flowing in and out of the business may be very much the same. About 1920 the accounting profession began placing emphasis on the accrual method of accounting to overcome this difficulty.

The accrual method portrays the smoothed-out profit as if all the transactions had been for cash and as if the business had purchased only exactly what was needed to make the sale. It is not an accurate portrayal of everything going on in the business, but it is a good approximation of the net effect of those things that affect profit. The problem is that so much emphasis has been placed on the accrual method income statement and balance sheet that the importance of cash has been regulated to virtual obscurity.

Even this result is satisfactory when the reports are describing large businesses with access to external financing through the stock market, commercial paper, and bank loans at the prime interest rate. But companies that do not have access to these external sources of financing have a different problem. For them, the flow of cash through the business means life or death, whether the accrual based profit is great or terrible. When new or small businesses need cash they must turn to the bank, the banker will look to the personal savings and assets of the owner-manager for collateral.

Accountants have not forgotten nor overlooked the importance of cash. They recognize the need for cash in sufficient quantity to keep the business operating. For their purposes, however, they often infer the cash available to the business from the income statements and describe future cash availability with the balance sheets. They, and others, frequently describe it as: cash flow equals net profit after taxes plus depreciation and other noncash expenses, such as amortization.

This statement is incorrect except under some very stringent preconditions that rarely exist in practice for a small business. This statement is an approximation that is valid for large and stable businesses in which changes from year to year are small and the statements from which the cash flow is inferred are annual reports. For a small and new business looking at monthly financial reports this approximation is inadequate. In a small, growing business the net cash flow to the firm’s bank account does not equal the net profit plus depreciation. Profit is not cash nor is it cash flow.

Although this pronouncement may be unconventional, entrepreneurs are realistic. Successful entrepreneurs ask how it really works and then get on with building their business. In the conventional approach the analysts, having inferred cash flow from profit, depreciation, and amortization, stop there, allowing their readers to assume that the resulting cash is in the bank wiating to be spent.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight

Compelling Business Principles


The development of the business principles is a first stage for developing and raising the standards of practice in countering bribery. The fair business principles provide a practical tool to which companies can look for a comprehensive reference to good practice to counter bribery. Business principles are becoming an essential tool in the future for businesses and the companies of today should encourage using them as a starting point for developing their own anti-bribery systems or as a benchmark.

I had heard and even observed how corrupt practices are carried out in businesses that add the extras to win export orders. For toting up luster to the evenings of the visiting business partners particularly from Gulf States, they fix up their visits to discotheques and nightspots. They also maintain luxury flats outfitted with floozy beauties for making the stay of the business guests a unique affair.

Unfortunately, such unethical practices have sneaked into the system via some (not all) businesses in different countries. That’s what I personally experienced when once as member of a foreign business team visiting an Asian country and staying at a luxury hotel, a businessman tried unethical tricks to win business contracts. He called from the lobby and told about the undeserved and undesired gift he brought for me.

Years ago in a domestic flight to the capital in a country in Asia a passenger seated next to me told that he was visiting the capital about a government tender. He was confident that he would win the contract. When I asked about the source of his confidence he pointed to two girls seated in the rear and said, “Those butterflies (exquisite women) will make it happen.”

Most of companies contribute to election campaigns of this candidate or that. Interestingly sometimes some companies sponsor candidates of two opposing political parties. The idea is to get unjustifiable favors after the horse wins.

There can be endless list of such companies, which are ready to do anything to get business favors.

It is no mystery that a lapse in business ethics or even the appearance of one can significantly harm the reputation and business of a company. Once a company is suspected, accused, or found guilty of corporate wrongdoing, it often becomes subject to the scrutiny of governmental agencies, the corporate community and the general public.

Private sector organizations must now take account of increasingly stringent domestic and international regulatory frameworks. There is growing corporate awareness of the risks posed by bribery, particularly in the light of scandals, and the public is expecting greater accountability and probity from the corporate sector.

Emphasis needs to be laid on business principles for enterprises to prohibit bribery in any form whether direct or indirect. They should also commit to implementation of programs for countering bribery. These principles are based on a commitment to fundamental values of integrity, transparency and accountability. Firms should aim to create and maintain a trust-based and inclusive internal culture in which bribery is not tolerated.

Thus an enterprise’s anti-bribery efforts including values, policies, processes, training and guidance will become tools of future corporate governance and risk management strategies for countering bribery and unethical practices.

As part of civil society, at macro level, Federation of the Chambers of Commerce and Industry should work out a framework reflecting size of the companies, business sectors, potential risks and locations of operations. This should, clearly and in reasonable detail, articulate values, policies and procedures for preventing bribery from occurring in all activities under their effective control.

Such programs should be consistent with all laws relevant to countering bribery in all the jurisdictions in which an enterprise operates, particularly laws that are directly relevant to specific business practices.

At micro level each enterprise should develop programs in consultation with its employees, trade unions or other employee representative bodies. It should ensure that it is informed of all matters material to the effective development of the program by communicating with relevant interested parties.

While developing its program for countering bribery, the companies should analyze which specific areas pose the greatest risks from bribery. The programs should address the most prevalent forms of bribery relevant to each firm but at a minimum should cover areas such as bribes, political contributions, facilitation payments, gifts, hospitality and expenses.

A company should prohibit the offer, gift, or acceptance of a bribe in any form, including kickbacks, on any portion of a contract payment, or the use of other routes or channels to provide improper benefits to customers, agents, contractors, suppliers or employees of any such party or government officials.

It should also prohibit an employee from arranging or accepting a bribe or kickback from customers, agents, contractors, suppliers, or employees of any such party or from government officials, for the employee’s benefit or that of the employee’s family, friends, associates or acquaintances.

The enterprise, its employees or agents should not make direct or indirect contributions to political parties, organizations or individuals engaged in politics, as a way of obtaining advantage in business transactions.

Each company should publicly disclose all its political contributions, charitable contributions and sponsorships. It should ensure that charitable contributions and sponsorships are not being used as a subterfuge for bribery.

The enterprise should prohibit the offer or receipt of gifts, hospitality or expenses whenever such arrangements could affect the outcome of business transactions and are not reasonable and bona fide expenditures.

The board of directors, CEOs and senior management should demonstrate visible and active commitment to the implementation of the business principles.

The business organizations should assert elimination of bribery; demonstrate their commitment to countering bribery; and make a positive contribution to improving business standards of integrity, transparency and accountability wherever they operate. Business principles are going to evolve reflection of changes in anti-bribery practice as well as the lessons learned from their use and application by business.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please contact www.asifjmir.com, Line of Sight