How does a company with significant revenue, run out of cash?

A few years ago I met with a new client who had raised several rounds of funding and had significant revenue (if you were looking at from an accrual method of accounting perspective). When I asked what the bank balance was, I realized we had a problem. In fact, it was going to be difficult for them to even make payroll the next month.

You see, the company was selling goods to its customers with credit cards but not collecting the cash from the credit card companies for months later. You can’t make payroll today with cash you will receive in three months even if the revenue is earned today.

Accrual accounting recognizes transactions when they occur regardless of when the cash is exchanged. Cash accounting, on the other hand, recognizes transactions only when there is an exchange of cash.
As your company is getting up and running it’s critical to look at your books from a cash flow perspective.