Managing the Cash Flow Gap

• Author: James B. Edwards
• Date: 01 November 2014
• Published date: 01 November 2014
• DOI: http://doi.org/10.1002/jcaf.21997

3

© 2014 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.21997

f

e

a

t

u

r

e

a

r

t

i

c

l

e

James B. Edwards

Managing the Cash Flow Gap

This article is a

follow-up to

“Cash Manage-

ment: When Is It Safe

to Spend Again?” pub-

lished in the March/

April 2014 issue of

the Journal of Corpo-

rate Accounting and

Finance . The author

contended then that

we were in an extended

period of economic

turbulence. Since that

date, there does not appear to be

any new evidence that things are

changing for the better. During

the first quarter of 2014, U.S.

gross domestic product (GDP)

fell by 2.9%, a sudden reversal of

several previous quarters. This

is not a good signal for business

cash inflows, possibly forecast-

ing a gap in cash receipts from

customers in the near term.

While there are signs of

some new jobs, there may be

offsetting anomalies that con-

fuse the economic signals. For

example, when federal emer-

gency unemployment benefits

ran out in December, this may

have caused a lot of unemployed

people to stop looking for work

again.

1 This could artificially

drive down the jobless rate, as

has been the case in some recent

periods, as many job seekers

may have given up their job pur-

suit in despair.

INFLATION

Another anomaly may be

in the area of inflation. The

U.S. Department of Commerce

Bureau of Economic Analysis

calculated the rate of inflation at

2.13% in May. The Bureau mea-

sured an increase of $25.6 bil-

lion in personal disposal income

during May. Some economists

disagree with the calculation

of these metrics, citing critical

items that are excluded from

the measurements. A more sig-

nificant metric of relevance to

this article is the performance

of proprietors’ income. Propri-

etary income dropped from $8.0

billion in April to

$3.4 billion in May.

Many believe that

proprietary business

is the backbone of

the U.S. economic

engine.

Economists

generally believe that

high rates of infla-

tion are caused by

an excessive growth

in the money sup-

ply. Under condi-

tions of a liquidity trap, large

monetary injections into the

economy are like pushing a

string without moving the other

end of the string. A liquidity

trap refers to the phenomenon

where an increase in the supply

of money fails to lower inter-

est rates. When an economy

enters a liquidity trap, further

increases in the stock of money

will fail to further lower inter-

est rates and, therefore, fail to

stimulate the economy. That is

just about where we are right

now under the policies of the

Federal Reserve. Therefore,

when the money supply grows

faster than the rate of economic

growth, inflation will take place,

especially if real income earners’

savings and investments in pro-

ductive assets do not occur.

We are still in an extended period of economic

turbulence, writes author and veteran business

advisor Jim Edwards. And there is no new evi-

dence that things are changing for the better. The

U.S. gross domestic product fell by 2.9% during

the first quarter of 2014. That is not a good signal

for business cash inflows. And it possibly forecasts

a gap in cash receipts from customers in the near

term. So what strategy should treasurers adopt to

manage the cash flow gap? © 2014 Wiley Periodicals, Inc.