Your business's cash flow can be affected by asset and liability changes in your business. Changes in your assets and liabilities can affect cash flow in a way that signals serious problems:
Accounts receivable change: An increase in accounts receivable hurts cash flow; a decrease helps cash flow.
The accounts receivable asset shows how much money customers who bought products on credit still owe the business; this asset is a promise of cash that the business will receive. Cash doesn't increase until the business collects money from its customers.
Inventory change: An increase in inventory hurts cash flow; a decrease helps cash flow. Inventory is usually the largest short-term (or current) asset of businesses that sell products.
Prepaid expenses change: An increase in prepaid expenses (an asset account) hurts cash flow; a decrease helps cash flow.
The depreciation factor: Recording depreciation expense decreases the book value of long-term operating (fixed) assets. There is no cash outlay when recording depreciation expense. Each year, the business converts part of the total cost invested in its fixed assets into cash. It recovers this amount through cash collections from sales. Thus, depreciation is a positive cash flow factor.
Changes in operating liabilities: An increase in a short-term operating liability helps cash flow; a decrease hurts cash flow.
