Financial accounting and reporting have become far too complicated and opaque, which is one of the reasons the Financial Accounting Foundation (FAF, the overseer of the FASB or Financial Accounting Standards Board) has approved the formation of a new Private Companies Council to set differences in U.S. generally accepted accounting principles (U.S. GAAP), where appropriate, for privately held companies.
Today's financial accounting often places too much importance on fleeting, point-in-time determinations of "fair value" which may have little or nothing to do with the ultimate realization of, or ability to pay out cash.
There are really only three questions about an asset that matter:
- Can it be converted to cash?
- When can / will it be converted to cash?
- How much cash will there be when the dust settles?
The same can be said for liabilities or obligations:
- Will cash be required?
- How much? And
- When?
Owner/CEOs could benefit from a tighter management focus on their sources and uses of cash: what do I need cash for and where will it come from?
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