As my role as an executive financial advisor has evolved, I’ve enjoyed meeting, coaching, and mentoring new and young CFOs, controllers, and finance directors. I especially enjoy asking them questions that make them think hard.
Let’s address cash flow. Nearly every financial leader can tell me the historical operating cash flow (OCF) over the past year, and the reasons OCF is misbehaving.
And usually, I already know those reasons: timing differences or poor decisions and/or execution with working capital management. For example, too much inventory was purchased for varying reasons.
I don’t care what industry we’re talking about, or the financial maturity level of the management team. An organization’s business model should generally have a predictable OCF stream that will be shaped upward or downward based on one or two scenarios.
If you are not tracking with me, bear with me for a moment. In this brief discussion, I will explain what normalized OCF is (it’s not a budgeted number), why it’s important, and why we should use two to three scenarios to further unpack this number.
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