I always thought that profit was the most important sign of a company’s success. But now I understand why cash flow might matter even more. A company can be profitable on paper and still fail if it doesn’t have enough cash to pay employees, suppliers, or bills on time. Cash flow shows whether money is actually moving in and out of the business in a sustainable way.
For startups or small companies, this is especially critical because they usually don’t have large reserves to fall back on. I think managing cash flow well is a sign of strong leadership and realistic planning. It keeps the company stable while it grows.
Do you think most businesses fail because they don’t make enough profit, or because they fail to manage their cash flow effectively?
I believe that most small businesses fail because of negative cash flow rather than a lack of profitability. However, this isn’t necessarily due to poor cash flow management. A company can appear profitable while still struggling financially, since revenue is recorded once a customer is billed, even if the payment hasn’t been received yet. For example, my dad owned a marine services business for over 20 years. Although his company remained profitable on paper, he ultimately had to close it because too many customers failed to pay their invoices. This situation wasn’t a result of mismanaging cash flow, but rather circumstances outside the company’s control. When small businesses face this issue, they are often forced to take on debt to stay afloat, which worsens their cash flow, or they may have no choice but to shut down. In contrast, examples of poor cash flow management within a company’s control include the owner withdrawing excessive funds, poor inventory management, and maintaining unnecessarily high overhead costs.
The medical device industry is diverse and compromises of both public and private companies. Privately owned companies benefit from reasons that you mentioned such as faster and more flexible decision making. A private medical device company gives the owners more control with their products including the development and marketing. There can be more opportunities to invest long-term towards innovation which can be hindered for public companies that have to fulfill requirements for SEC regulations and the Sarbanes-Oxley Act.
Regarding your question, I also agree that it depends on the company, their goals, as well as their history. For example, a company that went from private to public is Stryker corporation. This change in 1979 followed by successful acquisitions has allowed them to expand their product line range while investing in research. Even though the company was making millions in sales as a private company, they have made billions of dollars in revenue growth for several years as a public company. Therefore, I think it depends on a company's capabilities and the decisions or obligations of the owners and shareholders.
My previous response was intended for your other discussion on public versus private companies, which I added there. However, I want to add to this discussion about cash flow versus profit. Understanding why cash flow is important can start with breaking down a cash flow statement. It represents how a company operates during a period of time, which can bring insight into how the company will operate in the future. A company can stay in business and grow when there is a positive cash flow from the net cash produced from operations and used for investing and financing. These values apply to both public and private companies, but their reporting requirements differ. Moreover, the net cash from operations is determined by the net income, compensation, assets, and expenses such as depreciation or amortization. The end-of-period cash and equivalents, which represent the available liquid assets, are determined by adding the net cash from operations, and the net cash used for financing and investing, to the cash and equivalents from the start of the period.
It is significant to note that cash flow can fluctuate in different periods, especially during times of investment, where a negative cash flow can occur. The periods need to be analyzed for uneven cash flow, which may deter investors from investing if that is the case, and cause the company to fail. Additionally, cash flow management is an indicator of leadership because managers use the statement to improve tasks, manage their staff, and budget.
I agree that cash flow, which indicates a company's capacity to continue operating on a daily basis, is frequently more significant than profit. The impact of timing is frequently disregarded, as even successful companies may experience difficulties if cash inflows occur after significant expenses are due. Forecasting and tracking payment schedules with clients and suppliers is therefore really important. Having money is only one aspect of good cash flow management; another is ensuring that it moves at the appropriate times to support operations and expansion.
Negative cash flow is definitely more influential than profit itself when evaluating when companies fail. Getting to a negative cash flow indicates numerous poor financial decisions; it is never the result of one mess-up. A medical device can remain unprofitable, but with a good cash flow, a business still has a chance to not fail. Taking on financial burdens without evaluating the future is a prime factor. At the start of a project, long-term leases of equipment or facilities, or over hiring personnel may not be seen as "bad" because in the short-term, there are no negative effects. When a project gets further along into the development process, cash flow will always decreases. Projects cannot be forecasted with a 100% accuracy, so having the financial means to solve issues is necessary. When a company gets into a tough spot where they need to optimize their cash flow to stay afloat, the long-term commitments made at the start of a project can become a very big issue. Growth and stability are often used together, but growing a company does not imply the company is stable in the long-term.
