It is the accrual basis taxpayer that becomes managed by cash flow. The differences between taxable income versus cash flow are primarily issues of timing. The strategy is to match cash flow out with deductible expenditures, and cash flow in with income recognized, however, tax law gets in our way. Accounts receivable and accounts payable only affect the accrual basis taxpayer. Account receivable represents income reported but not received and accounts payable are expenses deducted but not yet paid.
Inventory is a more permanent investment in the business.
Regardless of your method of accounting, inventory is not deductible until sold or disposed of. Once the inventory level is established and provided for, only a material increase or decrease in the amount will contribute to a timing difference between cash flow and taxable income. Property and equipment purchases can be big culprits in contributing to the gap. Fixed asset purchases are subject to complicated tax rules of depreciation. Small business owners struggle with the decision to buy or lease, pay cash, or finance fixed asset purchases.