Understanding a company's financial health and performance involves more than just looking at revenue growth and operational metrics. Many entrepreneurs tend to stick to revenue growth and operational metrics thinking that they are the important KPIs to know better about the company’s financial health. While these metrics are highlighted when explaining the company’s performance, it has to be noted that these metrics do not provide a clear picture about the company.
For example, Revenue growth is not reflective of how much core business activity has increased because the sheer volume and value of transactions makes it very easy to manipulate. Similarly, specific business metrics like CAC for SaaS/E-commerce companies can be fudged with to show an exaggerated view of efficiency.
Byju's is a prime example of unsustainable growth as their rapid expansion of business lines resulted in them struggling to sustain day-to-day operations, resulting in mass layoffs, inability to service debt, and a tremendous blow to its public reputation.
It is important that the management of cash flows is necessary for any business regardless of size to implement in order for them to grow sustainably.
A company's cash generating ability is its truest and most robust measure of success. The ability to generate cash indicates efficiency and growth potential as it shows how well the company is able to manage its receivables, payables and its inventory. Additionally, it is also an indication of the management of overheads, as inefficient businesses with out of control overheads tend to be cash starved.
Unlike revenue and profit, cash flows are not easily manipulated. This is because a company's cash balance is always visible in the company bank statements. It is imperative that the management emphasize on cash flow forecasting and management to ensure that they are always on top of their cash needs and can maneuver their way around adverse exogenous conditions.