top of page
  • Writer's picturewilliam wright

Metrics that matter, and those that don't: No.2 Cash flow

Updated: Jul 24, 2023

The second article in a short series on de-coding commercial growth and performance metrics, this one's on Cash Flow, discounted, positive and free cash flow, often not given the attention it deserves, it's value can be under-estimated, but why is it important and when should it be used?

Someone once said 'Revenue is vanity, profit is sanity, but cash is king' - hard to argue with if you own or run a business, any business, of any size! Hard to ignore if you are a commercial strategist or marketer.

Although revenue is often seen as one of the primary metrics with regard to growth it only accounts for the up-side and not 'money in the bank'. It doesn't help us understand margin pressure and in extreme cases, somewhat hidden trends toward persistent operating loss. The bottom line is that not all revenue is good, some sales can be unprofitable and in worst case scenarios can kill the business.

"We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas"

Michael Dell, founder and CEO, Dell Technologies

While it's important to know that there is a steady or increasing revenue pipeline, it's critical to know there's sufficient cash flow to sustain and build the business. Arguably, while sales should definitely be focused on winning revenue, commercial strategists and marketers may need a wider remit. Their challenge is how to generate 'good revenue', perhaps by driving other business outcomes like cash flow.

ROI vs DCF for marketing campaigns

Rather than ROI, Discounted Cash Flow (DCF) is arguably a better metric for measuring the value of an investment, a campaign or promotion - how much money will be generated in future, based in an investment today? It relies on estimated future cash flows, (which need to be accurate - that's a challenge), and takes into account Discount Rates or Weighted Average Cost of Capital (WACC), that is the rate of return (interest rate and time), expected by the business. So, why then if DCF is a better weighted, future predictor of investment value, do many commercial analysts and marketers still revert to ROI as their metric of choice?

Although arguably better than ROI as a measure of investment value, DCF was designed in an age when commercial and financial markets were more stable, returns were possibly more predictable or at least, less volatile. It's been around, at least in principle for some time, perhaps as early as 1700, and is still popular today. Initially promoted by John Burr Williams in 1938 in his "Theory of Investment Value", it became popular in the 1980's and 1990's. But, DCF has it's challenges. Not least amongst them is variability of projected future cash flows and 'inappropriate' adjustment of the Discount Rate.

APV and the credibility of DCF

The introduction of Adjusted Present Value (APV) method introduced in 1974 by Stewart Myers is one way to try and overcome some of the challenges of traditional WACC based DCF. Unlike WACC in DCF it separates the cost or debt and equity. However, APV is still essentially a DCF calculation and while more useful for business valuations it still has its problems. For more about APV, read the Harvard Business Review article "Using AVP: A better tool for valuing operations".

There's a great article on the credibility of DCF, in the The Columbia Law School Blue Sky Blog: "Time to trash Discounted Cash Flow as a Valuation Tool", by Arturo Cifuentes, Ph.D and Adjunct Professor of business in the Finance & Economics Division of Columbia University and in his detailed paper: "The Discounted Cash Flow (DCF) Method Applied to Valuation: Too Many Uncomfortable Truths" Essentially we should all be looking for more probabilistic characterisation of cash flows rather than deterministic manipulation of discount factors.

Positive cash flow

Positive cash flow from a business or project shows that the business or project is producing liquid assets. Free cash flow of FCF, is the cash flow after deduction of capital expenditure, (investment in assets - offices, machinery..). For a business comparing cash flow to free cash flow gives some insight into where cash is being generated and how the company is managing investment and debt. For a 'time-bound' commercial project or campaigns, directly tracking project, net or operating cash flow can be a useful indicator of liquid assets generated from the project.

Understanding the patterns, structure and distribution of cash flow within any project can inform tactics and build insight for future campaign effectiveness, product and brand management. It's not just about the overall cash flow but the variation of cash flow within a project or business, it's about understanding and managing the dynamics of cash flow. For commercial management, project cash flow can help quantify the productivity of resources being used on the project and determine more accurately, contribution to businesses liquidity.

Profit matters, cash flow matters more...

Commercial strategists and markets need to understand and monitor cash flow, from projects and as a whole for the business, they need to understand the impact that commercial operations have on cash flow. Building insight into the profile and patterns of cash flow within projects, from products, brands and throughout the business can only help inform commercial strategy, pricing and marketing.

Cash flow is a critical business metric, more useful than ROI or revenue alone, and even though it has it's challenges it should be considered a priority metric for all commercial strategies and marketers. Cash flow is not a complex metric, some of the variations have some complexity, but it's normally a pretty straightforward calculation. It's therefore surprising that it doesn't have such a high profile with commercial strategists and marketers, perhaps that needs to change?

Many businesses, especially in the burgeoning SaaS sector buy cash-flow as a loan or investment. But, that doesn't mean because the working capital shortfall or losses are covered, cash-flow isn't important. In the SaaS scenario where their is arguably an unhealthy obsession with ARR, cash-flow is even more important. It's an indicator of the underlying health of the business, it's ability to build and sustain commercial returns. Identifying opportunities to accelerate existing customer cash flow or originate new cash flows, from new customers and new markets could negate or reduce need for loans or investment. Sooner rather than later a business must generate positive cash flows, otherwise, there is no future.

"Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most."

Peter Drucker, management consultant, educator and author.

How marketing can drive cash flow

Here's a few things, that marketers and commercial strategists can do to drive cash flow:

  • Drive 'good revenue', there's no cash flow without revenue, but there is 'bad revenue', cleaning leads with an 'accelerated cash flow' lens might be a good place to start.

  • Target market opportunities that provide faster cash flow, existing customers for example or new markets opportunities with shorter decision making processes or sales cycles

  • Incentivise enterprise sales cycles, 'buy a pilot', stage payments, are payment terms factored into revenue opportunity analysis?

  • Focus on upsell and cross-sell opportunities, loyalty benefits, work with existing customers to understand buying behaviours and optimise sale to payment processes

  • Use your pricing strategy, test pricing against speed of decision making, monitor price 'drop-off' points, provide incentives for early payment, discounts for volume purchase, rebates and retrospective discounts, employ the psychology of pricing to accelerate buying decisions

  • Modularised offer portfolio, bundling, 'get started' packages, easy to buy add-ons, clearance discounts to shift old stock

Here's a few things that will kill cash flow, the don't do list:

  • It might sound ridiculous, but don't give away products or services that customers are willing to pay for - ever! Astonishingly, many do, especially start-ups, scale-ups and many SaaS companies that don't properly manage their services portfolio and intellectual capital.

  • Selling to customers or accounts where costs of acquisition or cost to serve are too high, or where short term churn could eliminate cash flow, or where the lifetime value just isn't good enough or retention costs are too high

  • Absurdly long payment terms - avoid these like the plague!

  • Not monitoring invoice collections, something that's left to accountants, that marketers should be interested in, overdue invoices can be an indicator of 'bad revenue', sadly Dunn & Bradstreet estimate that just 54% of companies pay on time.

  • Not monitoring cost of returns or suffering from post-pilot cancelation when costs are already sunk

  • Slow sales team ramp up - for smaller businesses, start-ups and scale-ups getting the sales team up to speed, winning 'good revenue' is critical, bad hiring here is a killer! Marketing can help accelerate targeting, focus on high value accounts, direct sales toward 'fast-turnaround' quantified opportunities and much more...but that's another blog.

The bottom line - things are changing

The future of cash flow analysis is likely to be in probabilistic modelling, correlation, risk tolerance and a more adaptive characterisations of cash flow. Probabilistic cash flow differs from DCF in that it's not deterministic, it provides forecast based on a range of different potential outcomes rather than a single-threaded forecast. It's based on analysis of 'what we know' about future cash flows, behaviours, propensity and willingness to buy. There may also be stochastic models that are more useful in helping predict cash flow over time.

This will inevitably mean more data, accurate data, especially for forecasting the patterns, structure and distribution of cash flow from projects and throughout the business. Ideally, marketers and commercial strategists along with data scientists and statisticians should be working together to provide more predictive, probabilistic projections of cash flow. The bottom line is that commercial strategists and marketers need to pay more attention to cash flow as a way to understand how marketing and commercial operations contribute the health and well-being of the business.

Planning to increase revenue is one thing, but planning to avoid cash deficit is arguably more important. Even if you know there's a shortfall, and you plan to take on debt, you still have to work back toward a positive position sooner or later and to do that you need to understand and forecast positive cash flow. As Ralph Waldo Emerson, essayist, lecturer and philosopher once said:

"Money often costs too much"

Some final thoughts

It may be that while the mantra of sales should rightly be revenue, revenue, revenue, the tactical (there is an alternative strategic one..) mantra of marketing should be cash flow, cash flow, cash flow!

Remember - revenue is an accounting concept, it's not actually real, what's real is cash in the bank!

Here's another thought - how many businesses or marketers are managing a 'cash-flow pipe' rather than, or in parallel with a revenue one - that is, cash flow attached to leads, what could you learn if you had one of these?

And finally, let's face it, if you want a bigger marketing budget get in tune with what really matters to the business - help the business make money - focus on cash-flow!

Recent Posts

See All


bottom of page