ExecSense

In good economic times, many companies focused on the income statement when viewing its operating businesses. This can be a big mistake if you don’t look at the bigger picture. During the economic bubble, many companies recorded book profits, but had little operating free cash flow. The easy lending environment masked many cash flow issues; and when banks stopped lending many companies did not have enough free cash flow to operate. A business’s ultimate goal is to provide free cash flow that will either be used to pay dividends or provide capital for future cash flow.


Accounting rules are difficult to understand and often don’t give a clear picture of how a company is doing. Cash flow is much easier to monitor and if you understand where your cash flow is coming from and where it is going, you can better gauge of your operating performance. Either you generated the cash or you did not. By keeping your eyes on the basics, you can better manage your business and not get caught as easily when lending patterns and economic forces move in a different direction.