Know the Figures

Accrual ↔ Cash Basis Converter

Reconcile reported profit to the money that actually moved.

Replaces: Accountant reconciliation work and paid close software

How to use it

Start from either reported profit or net operating cash, enter the non-cash costs and the movements in working capital, and the calculator walks between the two. It is the operating section of a cash flow statement, built one line at a time.

Where the number comes from

  • Depreciation, amortisation and share-based compensation reduce profit without any money leaving, so they are added back.
  • Assets absorb cash as they grow: a rise in receivables, inventory or prepaid expenses is subtracted.
  • Liabilities release cash as they grow: a rise in payables, accrued expenses or deferred revenue is added.
  • Converting the other way applies the identical adjustments with the signs reversed — the relationship between the two bases is symmetric.
  • Cash conversion expresses the result as a percentage of the starting profit, which is the quickest read on earnings quality.

What goes wrong

The part most calculators leave out.

  • This covers operating items only. Capital expenditure, borrowing, repayments and dividends all move cash and none of them appear here — operating cash flow is not free cash flow.
  • The sign convention catches people out. Enter the change in the balance, not the balance, and use a negative number when a balance fell.
  • Tax is treated as whatever is already inside your starting figure. Deferred tax movements are not modelled separately and can be material.
  • One period tells you little. Cash conversion swings wildly month to month with invoice timing; the trend across four quarters is the signal.
  • A high conversion ratio is not automatically good. Collecting faster by factoring receivables or paying suppliers later improves the ratio while making the business more fragile.

The profitable year that produced no cash

A company reports 480,000 of net income. Add back 145,000 of depreciation and 60,000 of share-based compensation and it looks like 685,000 of cash. But receivables grew 210,000, inventory 85,000 and prepaid costs 12,000, while payables, accruals and deferred revenue added back 300,000. Net operating cash lands near 678,000 — close to profit only because deferred revenue happened to offset the receivables build. Strip out that 175,000 of customer prepayments, which is service still owed, and the picture changes entirely. Growth was being financed by customers paying in advance.

Questions

Why does profit differ from cash?
Accrual accounting records revenue when it is earned and costs when they are incurred, regardless of when money moves. Cash accounting records both when money moves. Every difference between the two is a timing difference that eventually reverses.
What is a good cash conversion ratio?
Consistently near or above 100% suggests profits are real and working capital is under control. Persistently below it means profit is being tied up in receivables and inventory faster than it is being collected.
Can a profitable business run out of cash?
Routinely, and fast-growing ones are the most exposed. Every new sale consumes cash for stock and receivables before it returns any, so growth and cash burn rise together while the income statement looks excellent throughout.
Does anything I type get sent anywhere?
No. The whole calculation runs in your browser. Nothing is transmitted, stored, or logged, and there is no account to create.

Last updated .

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