The Finance Gem 💎 #83

^{Welcome to Issue #83 of The Finance Gem}

^{Today’s Finance Gems:}

1. How to ask better cash flow questions

2. Why companies really fail

3. Markup is not margin

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1. How to ask better cash flow questions

Tracking cash flow is essential. But without context, metrics alone won’t cut it.

Most leaders focus on the numbers but miss the insights that drive smarter decisions. That’s where these 16 cash flow KPIs come in—paired with the right questions to uncover the story behind the numbers.

Start Here: The Key Questions

1. Cash Flow from Operations (CFO)
Are we generating positive cash flow from core activities?
Operational health starts here.

2. Operating Cash Flow Ratio
Can we meet short-term obligations with operating cash flow?
Liquidity is king.

3. Operating Cash Flow to Sales Ratio
How efficiently are we converting sales into cash flow?
Track revenue efficiency.

4. Net Income to Cash Flow Conversion
How much of our net income becomes cash?
Quality earnings matter.

5. CapEx Coverage Ratio
Can operating cash fund growth investments?
Self-financed growth = flexibility.

6. Free Cash Flow (FCF)
How much cash is available for reinvestment or distribution?
Plan for growth or returns.

7. Cash Reinvestment Ratio
What portion of cash flow goes to expansion?
Future-proof your business.

Dive Deeper: Advanced Metrics

8. Cash Conversion Cycle
How efficiently are we managing working capital?
Shorter cycles mean faster cash.

9. Operating Cash Flow to Debt Payments Ratio
Can we cover debt payments with operating cash?
Debt sustainability is non-negotiable.

10. Free Cash Flow to Equity (FCFE)
Is there enough cash for equity investors?
Protect shareholder interests.

11. Free Cash Flow to Firm (FCFF)
Are all capital providers adequately covered?
Satisfy both debt and equity holders.

12. Free Cash Flow Margin
How much revenue becomes free cash flow?
Cash efficiency starts here.

13. Cash Flow Return on Assets (CFROA)
How well are we using assets to generate cash?
Maximize asset productivity.

14. Cash Flow per Share (CFPS)
What’s the cash flow per share?
Connect cash generation to shareholder value.

15. Cash-to-Income Ratio
How much cash flow comes from each dollar of income?
Efficiency drives profitability.

16. Operating Cash Flow to Capital Employed Ratio
Are we leveraging capital effectively?
Strategic capital utilization wins.

Metrics only matter if you act on them. Use these KPIs to ask better questions, measure what matters, and drive sustainable growth.

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2. Why Companies Really Fail

When companies fail, the reasons often seem obvious:

• Lack of funds.

• Poor marketing.

• Economic downturns.

• Fierce competition.

These external challenges grab the headlines, but they rarely tell the full story. The truth? Most business failures stem from internal issues—issues that are both preventable and controllable.

Here’s what’s really going wrong behind the scenes:

1. Mismanagement of Cash Flow

Even a profitable business can collapse if it doesn’t manage its cash flow effectively. Without accurate forecasting, companies run out of cash at the worst possible moments, leaving them unable to cover expenses or seize opportunities. And as it turns out, cash flow forecasting isn’t quite a walk in the park.

There are rolling 13-week (and their stronger cousin 16-week) cash flow forecasts.

There are long-range forecasts (for 3 to 5 years).

There are direct cash flow forecasts (that start with cash collections from customers and add all sources and uses of cash)

there are indirect cash flow forecasts (that start from Net Income and adjust it for cash movements).

Learn how to do all this in less than 3 hours (plus master cash flow strategy to make 100% better business decisions. )

Once you have your cash flow forecasts, you ideally don’t want to have to go back and spend hours updating them the next week or month. At Financiario we’ve automated all of this (plus so much more).

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2. Lack of a Clear Value Proposition

If you can’t articulate why your product or service matters, why should customers care? Businesses often struggle because their messaging fails to resonate. A weak or unclear value proposition leads to lost sales and waning customer interest.

3. Inadequate Business Planning

A strategic financial plan connects business goals to the numbers that make them achievable. Without one, companies gamble with their future, missing opportunities and eroding long-term value.

Business planning isn’t a luxury—it’s a necessity for sustainability.

Check out this free mini-course I’ve put together to help you get this right.

4. Poor Leadership and Management

Leadership isn’t just about vision; it’s about execution and adaptability.

Businesses falter when leaders can’t or won’t pivot in response to changing market conditions. Decision-making is critical, but so is the ability to act decisively when it matters most.

5. Ignoring Customer Feedback

Your customers are your best source of insights. Ignoring their feedback—direct or indirect—can quickly push your business off track. Customer input should guide innovation, service improvements, and strategy adjustments.

6. Scaling Too Quickly

Growth is exciting, but scaling too fast without the right infrastructure is a recipe for disaster. Premature expansion creates operational bottlenecks, drains resources, and often leads to uncontrolled spending. Sustainable growth requires a stable foundation.

The Real Reasons Businesses Fail

Failure is rarely about external factors like the economy or competition. It’s about the choices leaders make—or don’t make.

• Cash flow mismanagement drains resources.

• Poor planning leads to missed opportunities.

• Weak leadership creates stagnation.

• Ignored feedback alienates customers.

• Premature scaling burns through capital.

The good news? These are all within your control.

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3. Markup is not Margin

Most people use Markup and Margin interchangeably. Big mistake.

These two metrics are NOT the same, and confusing them can lead to pricing errors that hurt the bottom line.

Here’s the difference:

Margin shows the percentage of revenue left after covering costs.

Markup is the percentage you add to the cost to set your price.

If you’re setting prices based on margin when you mean markup, you could end up underpricing—and leave money on the table.

Here’s a quick breakdown:

1️⃣ Margin = (Revenue - Cost) / Revenue.

↳ Tells you the profit percentage of each sale. If your product sells for $100 and costs $60, your margin is 40%.

2️⃣ Markup = (Revenue - Cost) / Cost.

↳ Shows how much you add to the cost to determine price. Using the same example, with a $60 cost and 40% markup, your price is $84 (not $100).

Here’s why this matters:

1️⃣ Underpricing Hurts Profitability

↳ Confusing margin for markup can lead to lower prices, eating away at profit and hurting cash flow.

2️⃣ Clear Targets for Sales Teams

↳ Margin and markup should be clear in your pricing strategy so sales teams know exactly how to hit profitability targets.

3️⃣ Improved Decision-Making

↳ Knowing the difference allows you to set prices that maximize profit and support healthy cash flow.

Don’t let this simple mistake cost your business.

Remember: Margin drives profitability, but markup sets the price.

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POLL TIME

As always, if you have specific suggestions or feedback, simply reply to this email.

Thanks so much for reading.

Oana

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