What are the limitations of using cash accounting to measure the performance of a business?

I am just wondering if when looking at the cash flow of a business can it actualy provide a useful measure of business performace?

What are the limitations of using cash accounting to measure the performance of a business?
There is an old saying in business " cash is real but profit is a matter of opinion". Businesses do not collapse due to a lack of profit but they do for a lack of cash. When assessing a business always look at two things cash generated as a percentage of sales ( entity cash flow) and the balance sheet. The balance sheet is a photograph of one moment in time of the health of the business, you need to understand stock levels, debtor levels ( usually in the context of sales) and the source and application of the money invested in the business. Profit is important of course but profits can be massaged through for example stock valuation or over optimistic views on the quality of debtors or the value of assets. The cash generated by a business over time is the best measure of its health.
Reply:The balance sheet can show past and present performance in terms of turnover and profit but cannot really help to assess future prospects.


How soon will essential equipment need replacing? Are enough young staff being recruited to continue development and growth? Are new products in the pipeline or have the competitors taken the lead in that respect? None of this can be answered from a balance sheet alone.
Reply:sounds like your homework question ;o)