This is a question often asked by business owners. They know sales are being made, but don’t know where the money goes. They do know that it’s not in the bank!
The answer lies in the activity in all the other balance sheet accounts.
Look at the following comparative balance sheet. (You may have to show the images in this email to see it.) Note that an increase in accounts receivable has a negative impact on cash due to more sales not being collected which ties up cash.
An increase in accounts payable means that some vendor payables have not been paid which has a positive impact on cash.
The last column becomes your de facto cash flow statement. And you know where the cash went!
Two rules to find the cash:
- An increase in any asset other than cash has a negativeimpact on cash and a decrease in any asset other than cash has a positive impact on cash.
- An increase in any liability has a positive impact on cash and a decrease in any liability has a negative impact on cash.
The Wisdom of Henry Hazlitt (1894-1993)
Many people see almost endless benefits in enormous acts of destruction. They talk about being much better off economically when we are at war vs. peacetime, for example. This confuses need with demand because the more war destroys, the more it impoverishes; hence, the greater is the postwar need.
But need is not demand. Effective economic demand requires not merely need, but corresponding purchasing power. Property cannot be replaced without the capital accumulation to make the replacement. And war destroys accumulated capital. It is never an advantage to have property destroyed by war unless the property is already valueless.
Hazlitt concludes that the wanton destruction of anything of real value is always a net loss, and that any offsetting considerations in a particular instance, can never be, on balance, a blessing.
— From Economics in One Lesson
