Cash: The ultimate yardstick of business success—How CFOs can restore focus on it
Cash is the oxygen of a business. No matter how profitable a company appears on paper, without sufficient cash flow, it cannot pay salaries, settle debts, or fund operations. Unlike accounting profits, which can be influenced by non-cash elements like depreciation or accruals, cash is tangible, real, and immediate.
Some reasons why Cash is the ultimate yardstick of business success.
Cash vs. Profitability: The classic misconception
Many businesses fall into the trap of equating profitability with financial strength. However, a profitable company can still experience cash shortages due to factors like slow receivables collection, high inventory levels, or aggressive capital expenditures. Enron, WeWork, and many other high-profile failures illustrate how a focus on reported profits rather than cash flow can be catastrophic.
Investor confidence and business valuation
Investors and stakeholders are increasingly paying attention to cash flow over profitability. Companies with strong free cash flow (FCF) tend to be more resilient during economic downturns, attract better credit ratings, and command higher valuation multiples. Even Warren Buffett prioritizes companies with consistent positive cash flow over those showing only accounting profits.
Sustainability and Growth
Growth is only sustainable if it is funded through internal cash flows or well-managed external financing. Businesses that grow too fast without strong cash discipline often face liquidity crises. A classic example is Uber, which despite its impressive revenue growth, has struggled with cash burn and investor skepticism.
How businesses lose sight of Cash
Overemphasis on Revenue and Valuation metrics
Many businesses, especially startups and high-growth companies, focus heavily on revenue growth and market valuation. In doing so, they sacrifice cash flow discipline. The “growth-at-all-costs” mindset often leads to excessive customer acquisition spending, high operational expenses, and weak cash reserves.
Example: Many e-commerce firms operate on razor-thin margins, focusing on top-line growth. However, their cash burn rates are unsustainable, leading to collapses when funding dries up.
Poor working capital management
Cash flow issues frequently stem from inefficient working capital management. Businesses that extend generous credit terms to customers while facing tight payment terms with suppliers create a liquidity mismatch. Excessive inventory holdings further exacerbate cash flow problems.
Example: Retail giant Toys “R” Us failed because it couldn’t manage its working capital efficiently. Despite strong brand value, its inability to service debt due to poor cash flow led to bankruptcy.
Misalignment between business strategy and cash management
Many businesses undertake ambitious expansion plans without a clear cash strategy. Mergers and acquisitions, new product launches, or geographical expansions require substantial cash outflows. If not managed well, these can strain liquidity.
Example: WeWork expanded aggressively without a sustainable cash strategy, leading to a liquidity crisis that ultimately forced a valuation crash and restructuring.
Inaccurate Cash Flow forecasting
A lack of rigorous cash flow forecasting results in unpleasant surprises. Many companies rely on static financial models that don’t account for real-time cash fluctuations. Poor visibility into future cash needs can lead to short-term liquidity crunches.
Neglecting Free Cash Flow as a KPI
C-Suite executives often focus on EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) as a performance metric. While EBITDA is useful, it doesn’t account for capital expenditures or changes in working capital, making it an inadequate proxy for actual cash flow.
How CFOs can restore the C-Suite’s focus on Cash
CFO’s are the guardians of financial health. Restoring cash discipline requires a multi-pronged approach:
Educate the C-Suite on the importance of cash
CFOs need to change the internal narrative from revenue and EBITDA to cash flow and liquidity. Conducting regular sessions with leadership teams and board members to emphasize cash metrics can create alignment.
Actionable steps
• Introduce free cash flow (FCF) as a key performance indicator (KPI).
• Highlight case studies of companies that failed due to cash mismanagement.
• Conduct quarterly cash flow reviews with the executive team.
Implement real-time Cash Flow Forecasting
Traditional cash flow models often fail to provide accurate insights. Implementing tools can help CFOs and finance teams predict short-term and long-term cash positions more effectively.
Actionable steps
• Use analytics for cash flow forecasting.
• Develop multiple cash flow scenarios (best case, worst case, most likely).
• Align cash forecasts with sales cycles, vendor payments, and capital expenditure plans.
Improve Working Capital efficiency
Optimizing working capital is a direct lever to improve cash flow. CFOs should enforce strict receivables management, negotiate better payment terms with suppliers, and optimize inventory management.
Actionable steps
• Implement dynamic discounting to incentivize faster customer payments.
• Renegotiate supplier contracts for better credit terms.
• Adopt just-in-time (JIT) inventory management to free up cash.
Align growth strategy with cash discipline
CFOs must ensure that expansion plans and investments are backed by strong cash flow fundamentals. Growth should not come at the expense of liquidity.
Actionable steps
• Set up an investment committee to assess cash implications of new projects.
• Establish a “cash runway” metric to evaluate financial sustainability.
• Encourage controlled expansion rather than aggressive cash-burning growth.
Strengthen liquidity management
CFOs should ensure that businesses maintain sufficient liquidity buffers to navigate downturns. This involves maintaining adequate credit lines, optimizing debt structures, and holding emergency cash reserves.
Actionable steps:
• Maintain a liquidity buffer equivalent to at least six months of operating expenses.
• Diversify sources of financing to reduce reliance on a single lender.
• Implement a rolling 12-month cash flow projection model.
Drive a Cash culture across the organization
Cash discipline should not be confined to the finance team—it should be embedded in the organization’s DNA. CFOs must ensure that department heads, procurement teams, and sales teams understand how their decisions impact cash flow.
Actionable steps:
• Link executive bonuses to cash flow performance.
• Conduct organization-wide training on cash flow management.
• Set department-level cash KPIs.
Conclusion: The CFO as the Cash Guardian
A business can have stellar products, strong customer demand, and even profitability—but without cash, it risks insolvency. The CFO’s role is to ensure that the C-Suite stays laser-focused on cash as the ultimate measure of success. By integrating cash flow metrics into strategic decision-making, implementing robust forecasting, optimizing working capital, and fostering a company-wide cash culture, CFOs can drive sustainable financial health.
In today’s volatile economic environment, businesses that prioritize cash will not only survive but thrive. It’s time for CFOs to lead this change and make cash the undisputed priority of every Boardroom discussion.
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