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Why Your Strategy Will Fail If You Don't Manage Cash Flow

Why Your Strategy Will Fail If You Don’t Manage Cash Flow

 Poor Tesco is so much in the news – but how can you report higher sales and profits if there is no cash to back them?  The accounts to 22 February 2014 show fairly consistent cash generated from operations. Tesco’s current issues with estimates and judgements might be obscured for a while, but truth will out.

 Cash flows and the adjustments to reconcile operating profit with operating cash flows must be understood – no doubt the analysts understand them. Ralph Tiffin’s new book, Executive Finance and Strategy, helps aid understanding through examples of just what cash flow statements can tell us. See below for examples:

 Statements of Cash Flows

(International Accounting Standards 7)

 Information about the cash flows of an entity is useful in providing users of financial statements with a basis to assess the ability of the entity to generate cash and the needs of the entity to utilise those cash flows.

 Cash is the one asset that flows all the time in most businesses. Cash is at the heart, if it is not itself the heart of most businesses.  Understanding the cash cycle of a business may assist in forecasting and strategy. Another reason for understanding cash flows and the disposition of cash in the business where it ends in the end of year balance sheet is that this affords a valuable check on the veracity of the prime financial statements, the income statement and balance sheet.

 The moral?

 You may mis-state profits but you’d also have to, let’s say, ‘obscure’ cash flows in the process. Read more in Chapter Eight of Executive Finance and Strategy: ‘Cash: The Vital Element.’ For an example to start you off, there’s also a table (8.7) to look at:

Check out the 'resources' section here.

Cash is disappearing, but is the company doing well or badly?

The answer is that this can be read both ways – illustrating the point that single sets of figures can sometimes point in opposite directions.  Figures should relate to the business – this is a very important theme throughout Executive Finance and Strategy.

The book also contains an analysis of H J Heinz over three years – a solid company and a steady cash generator. No wonder Warren Buffett invested in it!

Generating cash is vital to any business, venture or project.  Projected negative cash flows over years are intolerable – we have examples today in the form of HS2 and the Edinburgh tram!! So make sure your investment of cash flows is well understood before you can say your strategy is right.

Executive Finance and Strategy by Ralph Tiffin (August 2014) is available at a 20% discount when you use the code EXCF20 at checkout on