Cash is king.

This summer, my family and I embarked on a small business venture. We opened up a small pet boutique on Long Beach Island, N.J. The purpose (other than ensuring that our three teenagers were not idle this summer!) was really to do something together as a family that the kids might learn something from.

Our initial idea was that any profit made (to anyone who has started a retail business, the thought that there might be profit is now laughable!) would be donated to local animal rescue groups. It has proven to be a fun seasonal business, and we have rescued another dog ourselves in the process (that's four and counting!).

[ILLUSTRATION OMITTED]

Each of the children has shown their individual strengths in this process. The oldest is very creative and has put together product displays that I would never have thought of. Others are good at talking up the customers and leading them to products that they might like. Me, I am all about the spreadsheets and the numbers (I bet you are all surprised by that!).

The reason I bring this up in this column is that as I analyzed our little business's results and determined pricing and purchasing decisions, the only metric I used was cash. It is really the only thing that matters when you are attempting to run a business. Is there enough cash to pay the employees? The vendors? The credit card company? The landlord? How much new inventory can we afford to order this month? And so on.

Cash Is the Key Metric

As I think about financial reporting, I can't help but wonder why we have moved so far from the economic reality that is cash. At the end of the day, isn't the important metric how much cash this business has the ability to generate? I think that's why I am so puzzled by the FASB's and the IASB's current direction on determining the "fair value" of assets and liabilities. Call me a simpleton, but I have a lot of trouble understanding the relevance of a value that someone else's business would put on my assets, rather than what I expect those assets to generate for my business.

Returns to investors come in the form of cash dividends and the cash realized from market appreciation. When someone invests, a judgment is made as to whether that cash investment will provide an appropriate return in the form of cash dividends and appreciation.

One of my favorite professors from graduate school, Dr. Robert Howell, has written several thoughtful articles on this topic over the years (including for this magazine). He reminds us of the importance of reporting cash flows--he is a big advocate of cash! To quote from an article of Dr. Howell's articles, written several years ago for this magazine (but probably more relevant today than ever!):

"There are only three ways management may increase the real market, or 'intrinsic,' value of a firm. First, increase the amount of cash flows expected at any point in time. Second, accelerate cash flows; given the time value of money, cash received earlier has a higher present value. Third, if a firm is able to lower the discount rate that it applies to its cash flows--which it frequently can--it can raise its net present value."

When Valuation Ignored the Basics

The valuation courses I took in grad school also focused on discounted cash flow models. In the late 1990s, valuation techniques went away from the basics--discounted cash flow--to other methods, such as multiples of revenue, "eyeballs," etc., to reflect the startup mode of many of the Internet companies that had just gone public.

My study group and I did our major project on Amazon.com. We arrogantly determined that discounted cash flow didn't make any sense in valuing a company in this new world. As I look back now on our naivete, I can't help but think about the importance of cash and getting cash reporting right.