Principles Based on Sustainable Cycles
Cash Flow Lending is not just for commercial lenders. The analysis of liquidity (Does a company have the resources necessary to cover its debt obligations?) is critical for all financial analysts—CPAs, CFOs, investors, credit reporting agencies, university instructors, and lenders. Everyone that analyzes the financial condition of companies should read the first four chapters of this book (two more chapters are for lenders, the final three for very serious academics).
The book begins by placing the foundational concepts of operating, financing, and investment cash flows into a logical framework of sustainable cycles. This led to startling discoveries. The discovery that there is an account missing from the balance sheet was first validated in The Journal of Accountancy: “The Missing Piece in liquidity calculations–why calculating ‘the current portion of fixed assets’ would provide a more accurate picture of financial health,” and in subsequent articles in The RMA Journal.
CPFA revealed that fixed assets contribute to revenue (cash flow) in the current period. In effect, a portion of the fixed asset cycle overlaps the “current cycle,” which reveals that there are two tiers of liquidity: working capital vs. trading capital. Illustrated here and explained in Chapter 2.
Two-tier liquidity advances our understanding of liquidity and sharpens our measures of loan repayment, as summarized in the table below
Furthermore, analyzing how cash flows between cycles reveals answers to questions such as: “How does AT&T pay its creditors on time despite a negative trading capital?” (answer: cross-cycle repayment). And, “Can a term loan be made to finance a permanent increase in working capital?” (answer: cross-cycle financing). Ultimately, the theory of cash flow cycles finds practical application in identifying cash flow problems and their remedies.
The framework of Cash Flow 3.0 is a bold paradigm shift, the kind that comes rarely in established fields. Yet at its foundation is the common-sense best-practices paradigm that has always guided cash flow lending: short-term loans finance short-life assets, long-term loans finance fixed assets.
Each discovery reinforced the others, collectively forming a new generation of cash flow analysis: Cash Flow 3.0.
Where is the book Cash Flow 3.0?
Cash Flow Lending replaces the original book entitled Cash Flow 3.0. The foundation of Cash Flow 3.0 remains the same; new sections reflect a decade of professional and academic discussion including:
(1) Is the Current Portion of Fixed Assets a “current asset?” (including FASB’s initial response.)
(2) CPFA brings new clarity to the treatment of Maintenance Capital Expenditures by distinguishing between replacement capex and growth capex.
(3) Practical applications in solving cash flow problems and crafting a cash flow strategy replace esoteric sections, improving readability and usefulness.