Cash Flow Book

Principles Based on Sustainable Cycles

This fresh look at cash flow lending begins by illustrating how the traditional best practices paradigm short-life assets are financed by short-term loans, long-life (fixed) assets are financed by long-term loans can be explained by viewing cash flow in terms of natural cash flow cycles.
Moreover, this led to startling discoveries, especially the discovery that there is an account missing from the balance sheet. 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 long-term fixed asset cycle overlaps the “current cycle,” identifying two tiers of liquidity: working capital vs. trading capital. Illustrated in the figure to the left 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 (taken from Figure 4.1 and described in Chapter 4)

Furthermore, understanding how cash flows between cycles answers questions such as: “How does AT&T remain current with creditors despite a multi-billion dollar negative working 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, theory finds practical application by identifying cash flow problems and their respective remedies.

Each discovery reinforced the others, collectively forming a new generation of cash flow analysis: Cash Flow 3.0.

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.

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.