Power of Cash Flow Statements - CFO, CFI and CFF vs EBITDA

As a business leader with over 21 years of experience, I’ve worked with organizations through good and bad times, capitalizing on opportunities and delivering growth. While I worked to turn the tide and deliver profit by growing revenue and managing cost levers, the key learning has been cash management, even when you are EBITDA positive. 

Many promising businesses (and even more in the case of startups today) fail to make an impact because they are not able to manage the CASH – CFO (Cash From Operations), CFI (Cash From Investment), and CFF (Cash From Finance).

Today, let’s explore the cash flow statement—a compass that guides strategic decisions.

Why Cash Flow Statements Matter

1. Beyond Numbers: The Pulse of Viability

While profit and loss statements showcase revenue and expenses, they don’t reveal the full story. Imagine a ship sailing smoothly on paper but battling hidden currents. The cash flow statement unveils these undercurrents—tracking cash inflows and outflows. It’s our financial GPS, ensuring we stay afloat.

2. Strategic Insights

As a seasoned leader, I’ve learned that cash flow statements offer strategic insights:

1. Cash From Operating (CFO) Activities: Here lies the heartbeat of our business—the cash generated from day-to-day operations. Efficient collections, prudent payments, and managing working capital—these are our levers for success. CFO is not only about the profit generated and the collection made against the sales done; managing Working Capital requirements, especially in manufacturing and consumption-led industries, is important.

2. Cash From Investing (CFI) Activities: Our investments shape our destiny. Timely investments in acquiring assets or divesting a non-performing asset sometimes present the difference between being successful or not so successful. As a business leader, your role is to keep an eye on your investments, their returns, and plan for future investments as may be required for growth.

3. Cash From Financing (CFF) Activities: You are going to be responsible not just for delivering growth in revenue or managing costs, but also for arranging cash to push for this growth. Several avenues are available for this, issuing stocks, raising debt, changing the working capital cycle (short-term impact), ensuring debt repayment (on time to avoid NPA); it’s all about balancing risk and growth.

EBITDA vs. Cash Flow: The Duel

The debate has been raging for quite some time now. With companies and investors focused on EBDTA for a long time, they assumed cash is something which one will always be able to manage. In the past few years, investors have added CASH Flow as a key metric to their evaluation, especially with innovative accounting practices to shore up EBIDTA. While we argue in favor of Cash flow as being a higher weight order to evaluate an organization, we cannot ignore EBIDTA.

Let’s look at the two more closely:

1. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization):

o   EBITDA is the rock star of financial metrics. It strips away non-operational elements, giving us a clear view of operational performance. But beware—it’s not the whole concert. EBITDA ignores taxes, interest, and capital expenditures. It’s like evaluating a ship’s speed without considering wind and currents.

2. Cash Flow Statement: The Symphony:

o   Enter the cash flow statement—the orchestra of financial health. It harmonizes EBITDA with reality. It accounts for taxes, interest, and capital expenditures. It tells us if our ship is truly seaworthy. Cash flow from operations—our true north—reveals the cash generated by core activities.

Read Everything Together!

Cash flow statements need to be read in conjunction with operational, financial, and investment-related statements from the organization. Do the two matche? Cash flow alone may be misleading, and everything else without the cash flow will be even more misleading. Sustainability and consistency in each of the 3 - CFO, CFF, and CFI:

1. Positive CFO, with the right PnL benchmarks vs. industry.

2. A CFF at the right costs and payback supported by CFO.

3. Prudent investment (CFI) towards growth and a defined strategy, helps in a strong and stable organization.

Warren Buffett’s Wisdom

The Oracle of Omaha, Warren Buffett, doesn’t pick sides. He appreciates EBITDA’s clarity but insists on the cash flow statement. Why? Because cash doesn’t lie. In his words, “In the world of business, the rearview mirror is always clearer than the windshield.” Buffett knows that EBITDA can dazzle, but cash flow sustains.

In Summary

Embrace both EBITDA and the cash flow statement. They’re not rivals; they’re partners. EBITDA shows the spotlight, but cash flow keeps the ship steady. Let’s navigate these seas, guided by Buffett’s wisdom

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