CC Biz Buzz is a column series that features insightful commentary from a faculty member of the Columbia College Robert W. Plaster School of Business.
By Gina Singleton
Have you ever been surprised by a local business closing because it seemed like they always had customers and business was booming? I have felt that way too many times, particularly with local shops and restaurants. It is a heartbreak many of us share. You fall in love with a place, only for it to close a few years later.
While there are many reasons a business might fail, one common issue is a misunderstanding of a core accounting principle. One of the first things I teach my students is that sales revenue and cash are not the same thing. In many cases, the difference really comes down to one simple factor: timing!
This is where accounting can get a little tricky, especially for small business owners. Many small businesses use the cash basis of accounting because it is simpler. Revenue is recorded when cash is received, and expenses are recorded when cash is paid. But in real life, cash does not always move at the same time the work happens, especially in business-to-business transactions. A customer may pay before receiving a service, or a business may provide a service and wait weeks or months to be paid. That is one reason we mainly focus on accrual accounting.
Accrual accounting is also required under General Accepted Accounting Principles (GAAP), the standard financial reporting rules used in the United States. Companies that share financial statements with banks, investors, auditors or regulators often need to follow GAAP so those statements are consistent and useful for decision-making. In other words, accrual accounting matters because it helps reflect the financial reality of a business, not just when cash happens to come in or go out. Accrual accounting helps students see the full picture by recording revenue when it is earned and expenses when they are incurred, regardless of when the cash changes hands.
I love to use the example of purchasing a flight. Unless there is an emergency, most of us buy our plane tickets well ahead of time. If you buy a ticket in May for a trip in August, the airline receives your cash in May. But has the airline performed the service yet? No. The airline will provide that service in August when you fly to your destination. Under accrual accounting, the revenue is not earned and recorded until August even though we received the cash in May.
The opposite can also happen, and this is where businesses can run into trouble. Imagine you decide to renovate your kitchen. A construction company completes $20,000 of work to your kitchen in May. Because the company provided the service, it records $20,000 in revenue in May under accrual accounting. But what if you do not pay that bill until August?
On paper, the business had a great May. In reality, it still has to cover payroll, rent, utilities, supplies, insurance, and other costs that require cash in June and July. If that company does not have enough cash saved from prior jobs or other customers, it may struggle to keep up with its obligations even though its records show revenue.
This is why I have always appreciated the cash flow statement. I get a little giddy the day we begin the cash flow statement in my Accounting 2 course. My students may roll their eyes at first, but by the end of the unit, they hopefully understand its importance, its intricacies and its connection to the other financial statements. Putting the cash flow statement together is like solving a fun puzzle!
The balance sheet gives us one line item for cash at the end of a period. For example, if a company uses a calendar year, the balance sheet may show the cash balance on Dec. 31. That number is useful, but it is only a snapshot. The cash balance may be completely different on Jan. 1. The cash flow statement tells a fuller story. It helps show whether a business can sustain its daily operations. It gives owners and managers a clearer picture of what cash is coming in, what cash is going out, and whether the business has enough liquidity to keep moving forward.
This is not just an accounting issue. It is a workforce issue, a small business issue and a community issue.
The same is true for local business owners. Strong revenue does not automatically mean financial stability. Businesses need careful planning, great recordkeeping and regular review of their financial statements to avoid cash flow issues like this.
Students who understand the difference between revenue and cash are better prepared for careers in business, management, finance and entrepreneurship. They learn that good decision-making requires more than looking at sales numbers. They learn to ask better questions: When will the cash come in? What debts are due first? Can this business grow sustainably?
Financial literacy is often associated with personal budgeting, and of course that is important. But financial literacy also includes understanding how organizations function. When students graduate with a better grasp of core concepts like cash flow, they become more valuable employees, better future business leaders and more responsible citizens.
In the end, accounting is not just about numbers on a page. It is about understanding the financial reality behind those numbers. Revenue may show promise, but cash flow shows whether a business can keep its promises. Timing matters, and sometimes it matters more than people realize. That is why the cash flow statement remains one of the most important tools in business and one of the most important lessons we can teach.
After all, in accounting, as in life, timing is everything.
Gina Singleton is an Associate Professor of Accounting at Columbia College who teaches a variety of Accounting courses. She holds a master’s degree in Accounting from the University of Missouri. She is a licensed CPA in the state of Missouri. She has worked as a senior auditor for a “Big 4” public accounting firm, as an accountant in the construction industry and as an adjunct at Columbia College.
