The Finance Gem đź’Ž #93: How to Master Cash Flow

Author

Oana Labes, MBA, CPA
May 03, 2025

In partnership with

Hello Finance Gem collectors. Welcome to Issue no. 93.

Here’s what’s covered today:

How to Master Cash Flow (Without Guessing What the Numbers Mean)

Most CEOs glance at the cash flow statement and move on. But if you're only looking at the net change in cash—or worse, just EBITDA—you’re not leading with financial clarity.

Cash flow isn’t one number. It’s a system. A decision framework. A risk radar. And when you break it down into its 12 core signals, it tells you exactly how your business is running—and where it's exposed.

Here’s how to read it:

SECTION 1: THE CASH FLOW STATEMENT

1. Operating Cash Flow (OCF)
Cash from actual business operations—after working capital swings. This is where you validate whether your business model can sustain itself. Watch out for strong revenue with weak OCF?

2. Investing Cash Flow (ICF)
Covers CapEx, acquisitions, and divestitures. This shows how you’re deploying capital. Ongoing negative ICF could mean strategic reinvestment—or waste, if ROI isn’t there.

3. Financing Cash Flow (FCF)
Captures how you raise and repay capital: debt, equity, dividends. This is where you learn whether growth is self-funded or dependent on outside money—and what your capital structure is really costing you.

SECTION 2: CASH FLOW & DECISION MAKING

4. Free Cash Flow to the Firm (FCFF)
What’s left after OpEx and reinvestment—available to all capital providers. This is the backbone of valuation. Declining FCFF limits optionality and weakens your negotiation position with investors.

5. Real Free Cash Flow (RFCF)
Cash left after mandatory CapEx and debt service. This is the money you actually control—for growth, dividends, or a downturn buffer. It’s how you measure internal investment capacity.

6. Discounted Cash Flow (DCF)
This is much more than a valuation tool—it’s your capital allocation filter. Use it to test project ROI, set pricing strategy, and plan M&A. If the DCF doesn’t work, the strategy doesn’t either, but DCF is driven by assumptions so make sure you’re ready to back those up.

SECTION 3: CASH CONVERSION CYCLE (CCC)

7. Days Inventory Outstanding (DIO)
How long cash is tied up in unsold goods. High DIO means your working capital is sitting on shelves so improve this to accelerate cash velocity.

8. Days Sales Outstanding (DSO)
How fast you collect after a sale. High DSO slows your ability to reinvest and cover obligations. And if sales are growing but DSO is slipping, your cash position is getting weaker.

9. Days Payables Outstanding (DPO)
How long you delay paying suppliers. Used smartly, it’s a cash preservation lever. Used poorly, it damages supplier relationships and introduces supply chain risk.

Here’s the simple math you need to know:

CCC = DIO + DSO – DPO → Lower = faster cash.

SECTION 4: CASH FLOW KPIs THAT MATTER

10. Operating Cash Flow Margin
What % of your revenue becomes operating cash. It’s a real-time signal of cost structure and operating leverage. A declining margin means you're scaling inefficiently, even if top-line looks good.

11. Cash DSCR & FCCR
Debt Service Coverage and Fixed-Charge Coverage Ratios—based on cash, not earnings. The ratios lenders use need a cash sanity check. Declining coverage means tighter debt capacity and higher risk of covenant breaches or worse - payment defaults.

12. Current Ratio (C/R)
Basic liquidity test: current assets ÷ current liabilities. But don't stop at the number—look inside. If “current assets” are mostly aging receivables or obsolete inventory, your liquidity isn’t real.

Bottom line:
Cash flow isn’t a summary metric—it’s your real-time financial control system. Use it to surface risks, pressure-test decisions, and manage capital with precision.

If you want to sharpen how you use these concepts and learn practical cash flow strategy check out my The Cash Flow Masterclass.

Want to train your entire team? Send me an email.

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